written by Khatabook | August 23, 2021

What Are Debit and Credit? Bookkeeping Basics Explained

Knowing what is debit and credit is central to the very idea of bookkeeping and the basics of accounting. These are required for appropriate accounting entry.  It is necessary that whenever there is an entry in the form of credit, you would need to have a corresponding entry in the form of debit for the account or the books to be balanced and correctly accounted for. The concept of balancing the books of accounts is central to the very concept of accounting. Hence, if there is any laxity in the lapse of the balance thereof, it could derail the whole process of debit credit accounting.

Debit and credit meaning 

In order to understand these better, learning about the golden rules of accounting is necessary. They are:

  • Debit the receiver, credit the giver.
  • Debit what comes in, credit what goes out
  • Debit all expenses and losses and credit all incomes and gains

Whenever there are any business transactions, there is an impact on the financial accounting of an organisation where debit and credit records need to be maintained. While we look at companies' financial statements, we need to look at debit and credit meaning to get a fair idea of the extent and nature of the financial transactions that have taken place. 

These financial transactions are the key to every organisation and hence, extremely important to be kept track of for perfect bookkeeping. In bookkeeping, for every transaction made on the debit side, there has to be some exchange for the same value so that the books are balanced.

What does debit mean? 

The entry of debit is on the left-hand side of the accounting ledger and corresponds to something that increases the value of the expense account or enhances the value of an asset.

If we were to look  at credit vs debit, you would see that credit occurs on the right-hand side of the bookkeeping ledger, which increases the company's equity account and decreases the company's expense or assets account. This, in essence, is the most simple of explanations of the concept of credit and debit meaning.  

Accounting transactions and concept of debit and credit

In the simplest of terms, whenever a financial transaction takes place, there are at least two financial accounts that are created. The number of accounts may be more, but the bare minimum of impacted accounts must be essentially two. It is also possible that multiple accounts may be created to look at all the debit vs credit transactions, but this can under no circumstances be less than two in number. 

When you consider the meaning of debit and credit, you would realise that the total of the entries that goes into the debit side should equal what goes into the credit side in one or more books of account. This is the basic principle on which hinges the concept of balancing the books of accounts. If the books are not balanced by ensuring that credit and debit are equalised, one will not achieve the primary objective of balancing account books.

The above concepts of debit/credit may seem a bit confusing at the beginning, but once it is explained in detail and along with proper examples, the concept would begin to start appearing much clearer. This is why in finance and accounting courses, the meaning of debit and credit is one of the most fundamental concepts taught and elucidated for the benefit of students. This concept is also popularly known as the concept of double-entry bookkeeping that is popular amongst teachers and practitioners of finance and accounts. 

The largest and smallest of organisations would not function from the financial perspective unless and until these concepts were clarified and made lucid. This lays the foundation of the whole accounting world and is hence hailed as one of the basic concepts that students of commerce or chartered accountants must master before they move onto more complex concepts in the world of finance and accounts. With practice, students and practitioners of accounting can know what is credited or debited easily. 

Also Read: NACH e-Mandate – Guide to Meaning, Benefits & How it works?

Some more insights into debit and credit in accounting

The basic underlying principle on which the whole accounting system works looks at Assets = Liabilities Equity. 

The meaning of this is that you can build up assets if these have been paid for using liabilities or equity. So a company that wants to have assets needs to accumulate some liabilities or part with equity for the same. The difference between debit and credit is also brought to the fore that assets are essentially those aspects that include cash, plant and machinery, inventories, etc., paid for by the company, which means an increase in liabilities and reduction in liabilities equity of the said entity. 

More concepts related to debit credit: Types of accounts

The concepts of debit or credit are made more transparent when we look at the various types of accounts that exist and come into play whenever debit and credit in accounting are applied. These areas are stated below:  

  • Asset Account

The asset account consists of entries like cash, inventory, accounts receivables, prepaid expenses, equipment and property (including plant and machinery), and any vehicles that the particular organisation may be owning. 

  • Expense account 

The second type of account that one must consider is the expense account. Like in the case of individuals, corporate entities also have expenses that need to be appropriately accounted for in the books of accounts. These items in the expense accounts are items like rent, travel expenses, utilities, and advertising. In addition to this, other items in the books of expenses are salaries of employees, cost of maintenance of hardware, expenses related to software and the like.

  • Revenue Account

The third account in terms of credit or debit fundamentals is the revenue account. The revenue account considers items like sales and service revenue and investment income or interest income that accrues to the corporate entity. Revenue accounts are used by companies for storing credit balances.  It also consists of revenue recruits such as tax revenue, current receipts of government, etc. 

  • Liability Account

When we look into credit and debit, we also need to consider the Liability account. This is an account where the money is payable to other corporates or individuals by a firm. These are categorised as Accounts Receivables, Loans Payable, Income tax payable, and any bank fees that the company needs to pay. 

  • Equity Account

The last type of account that we must look at is the equity account when looking at the concept of debit credit. These are amounts that a company has regarding shares or stocks, bonds, and mutual fund deposits. In addition to this, it also looks at items like debt securities, pension fund accruals, retirement plans, and real estate that a company has in its account. 

Some Debit and credit examples

  • Let us say that a company sells a product for Rs 500 to a customer in cash. In this financial transaction, the revenue account and cash account of the company increase by Rs 500. You would need to increase the asset account with a debit entry on this account. On the other hand, as explained, the revenue entry would be enhanced by Rs 500.

Date

Account

Debit

Credit

XXXX

Revenue account

Rs 500

 

XXXX

Asset account

 

Rs 500

  •  Another example to show debit credit meaning would be to look at the prospect of a company purchasing Rs 15,000 worth of equipment for their needs. The equipment bought is a fixed asset; hence, Rs 15,000 would debit the fixed asset account. Corresponding to this, you would need to credit the accounts payable account for Rs 15,000. 

Date

Account

Debit

Credit

XXXX

Fixed asset account

Rs 15,000

 

XXXX

Payable account

 

Rs 15,000

  • There are various scenarios  of debit and credit when it comes to different types of accounts. In cash and bank accounts, when a customer pays or when you have to add in cash, it would fall on the debit side. However, it would figure on the credit side when bills are paid as you have made the payment vis-à-vis the outstanding bill, which stands on the credit side.
  • However, in accounts receivable, when a sale is made on credit, it figures under the debit side. In contrast, you would make an entry on the credit side when the customer pays against the receivable amount against the debtor.
  • In the case of accounts payable, when you give an example of what is credit and debit, the debit side entry is made when a bill is paid off and when there is a bill for future payment, it is entered onto the credit side. 
  • Expenses accounts look into matters about rent, payment of utilities, and payroll and office supplies. In these cases, the debit side entry is made when a bill payment is made and when you have a refund that is received, you would make an entry on the credit side.
  • When you look at the revenue side, the entry is made on the debit side when a discount is allowed or when a product sold is returned. On the other hand, an entry is made on the revenue side when there is a sale, and the revenue accumulates over time to a firm. This is what constitutes certain examples on what is debit and credit in accounting.  

Also Read: What are Debit, Credit Note and their Formats?

Conclusion

Once you know the fundamentals of debit and credit, you would realise that the concept is not as challenging as it seems initially. These two concepts are important for maintaining account entries and therefore, their appropriate usage is necessary. In order to do that, understand the basics of debit credit accounting so that you can avoid any errors in bookkeeping. We hope through this article, we have been able to provide you with valuable information regarding debit and credit. You can also refer to Khatabook for more information. 

FAQs

1. What is a double-entry bookkeeping system?

The double-entry bookkeeping system is a system of accounts that considers the debit and credit of an organisation. The system is such that any entry on the debit side needs to have a corresponding entry on the credit side.

2. Why should there be a balance in the bookkeeping system? 

The balancing of an organisation's accounts as per the bookkeeping system is necessary as without it being balanced, a proper record of the system would not be possible. Any imbalances in the books of account would adversely impact the whole of the accounting system and throw it off gear. Hence the debit and credit in accounting must be balanced and add up to the same amounts so that the double-entry bookkeeping system may be maintained as required. 

3. What are journal entries?

Journal entries are a method of visualising business transactions under debit credit accounting. These occur when you list down the debit and credit items on either side of the journal. The entry date is first indicated, followed by the respective account name and the respective entries against the account name. For instance, if Rs 5 lac is the cash in the account, it is written under the debit side, whereas there is a corresponding entry of Rs 5 lacs under the notes payable account name on the credit side.  

4. When is cash credited and debited?

As per debit credit accounting, the rule of thumb is that whenever cash is received, it goes into the debit side, and in case the money is paid out, it figures among the credit side

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