Meaning of Credit and Debit:
- While entering business transactions, debit and credit affect two types of accounts. They are alluded to in the books of accounts as Cr. for credit and as Dr. for debit.
- The right-hand side of a record is named as the credit side and the left-hand side of a record is named as the debit side.
- These terms address either increment or decline in a specific record, dependent on the nature of a record.
- If an entry is recorded on the credit side of a record, it is supposed to be credited to the record and if an entry is recorded on the debit side of a record, it is supposed to be debited to the record.
Rules of Debit and Credit:
According to the Double Entry System of bookkeeping, each business transaction or exchange has two angles. One of them is the income or receiving aspect known as the debit perspective, and the other is the outgoing or giving aspect known as the credit aspect.
Based on these two viewpoints under the Double Entry System of Accounting, vital Rules of Credit and Debit are outlined, dependent on the idea of different accounts or records to effectively choose when to debit the record and when to credit the record. This is to guarantee the right impact and treatment for a specific exchange.
The business transaction or exchange is separated into accounts while doing the bookkeeping. The commonly affected accounts are-
- Expenses
- Liabilities
- Equity
- Revenue
- Assets
How Debit and Credit Affects Business Accounts?
The table below shows a brief overview of how debit and credit transactions affect business.
| Decreases in the account | Increases in the account |
| Expenses |
Credit | Debit |
| Liabilities |
Debit | Credit |
| Equity |
Debit | Credit |
| Revenue |
Debit | Credit |
| Assets |
Credit | Debit |
The Golden Rules:
The golden rules of accounting or the guidelines of bookkeeping oversee the standard of credit and debit. Before we analyse further, we should know the three renowned brilliant principles of bookkeeping:
Firstly: Debit what comes in and credit what goes out.
Secondly: Debit all expenses and credit all incomes and gains.
Thirdly: Debit the Receiver, Credit the giver.
In brief, the credit is ‘Cr’, and the debit is ‘Dr’. In this way, a ledger account, otherwise called a T-account, comprises different sides. As discussed before, the left-hand side (Dr) records the charge exchange and the right-hand side (Cr) records credit exchanges.
Assume a business buys capital assets with liquid assets such as cash, this exchange will increase the capital asset account and decrease the cash account since capital assets come in and cash leaves the business. Further, this increment in a capital asset account and the reduction in cash account are to be recorded in the capital asset account and cash account separately. This transaction will likewise be recorded in the ledger account.
Difference between Debit and Credit:
Credit | Debit |
| Meaning |
Credit is passed when there is a decrease in assets or an increase in liabilities and owner’s equity. | Debit is passed when an increase in asset or decrease in liabilities and owner’s equity occurs. |
| Personal Account |
Credit the giver | Debit the receiver |
| Nominal Account |
Credit all incomes and gains | Debit all expenses and losses |
| Real Account |
What goes out | What comes in |
| Appears on which side of a T-format ledger account |
Right side of the T ledger account | Left side of the T ledger account |
FAQs
Rules for Debit and Credit
What is the difference between debit and credit? ›
What's the difference? When you use a debit card, the funds for the amount of your purchase are taken from your checking account almost instantly. When you use a credit card, the amount will be charged to your line of credit, meaning you will pay the bill at a later date, which also gives you more time to pay.
How do you remember the difference between debit and credit? ›
Credits go on the right side. That's already the first main rule you have to remember: Debit means left, credit means right. Debit and credit do not mean plus or minus.
What is the difference between DR and CR in accounting? ›
An increase in liabilities or shareholders' equity is a credit to the account, notated as "CR." A decrease in liabilities is a debit, notated as "DR." Using the double-entry method, bookkeepers enter each debit and credit in two places on a company's balance sheet.
How to identify debit and credit? ›
Debits are recorded on the left side of an accounting journal entry. A credit increases the balance of a liability, equity, gain or revenue account and decreases the balance of an asset, loss or expense account. Credits are recorded on the right side of a journal entry. Increase asset, expense and loss accounts.
What is a debit vs credit for dummies? ›
Debits (often represented as DR) record incoming money, while credits (CR) record outgoing money.
What is a debit and credit in simple terms? ›
Debits and credits in double-entry bookkeeping are entries made in account ledgers to record changes in value resulting from business transactions. A debit entry in an account represents a transfer of value to that account, and a credit entry represents a transfer from the account.
What are two key differences between a debit and credit card? ›
Debit cards are linked to the user's bank account and limited by how much money is in there. Credit cards provide the user with a line of credit that they can borrow against as needed and pay back later. Credit cards charge interest on the money the cardholder borrows (unless it's paid back within the grace period).
Is debit money in or out? ›
A debit to your bank account occurs when you use funds from the account to buy something or pay someone. When your bank account is debited, money is taken out of the account. The opposite of a debit is a credit, in which case money is added to your account.
What is debit in simple terms? ›
Debit is a formal bookkeeping and accounting term that comes from the Latin word debere, which means "to owe". A debit is an expense, or money paid out from an account, that results in the increase of an asset or a decrease in a liability or owners equity.
What does the "Dr/Cr" mean on my invoice/statement? A "Dr" balance means a debit balance which is an amount due for payment, whilst a "Cr" balance means a credit balance which indicates that no payment is due.
What are the golden rules of accounting? ›
What are the Golden Rules of Accounting? 1) Debit what comes in - credit what goes out. 2) Credit the giver and Debit the Receiver. 3) Credit all income and debit all expenses.
Is debit positive or negative? ›
A Mathematical Understanding of Debits & Credits
Another way to understand debits and credits in business accounting is to look at them mathematically. A simple way to distinguish between the two is to know that a debit entry always adds a positive number to the ledger, and a credit entry always adds a negative number.
Is paying rent a debit or credit? ›
Answer and Explanation:
Rent expense is a debit in accounting because it is an example of expense. In debit and credit rules, all expenses are said to be debit accounts because the increase in its value is journalized through a debit entry.
What is the DR and CR rule? ›
Before we analyse further, we should know the three renowned brilliant principles of bookkeeping: Firstly: Debit what comes in and credit what goes out. Secondly: Debit all expenses and credit all incomes and gains. Thirdly: Debit the Receiver, Credit the giver.
Are expenses a debit or credit? ›
Expenses and Losses are Usually Debited
Expenses normally have debit balances that are increased with a debit entry. Since expenses are usually increasing, think “debit” when expenses are incurred. (We credit expenses only to reduce them, adjust them, or to close the expense accounts.)
Does debit mean owing? ›
Loans and Debts
What is this? In all these contexts, being "in debit" indicates a negative balance, which means that the account holder or entity owes money and needs to repay the outstanding amount to bring the account back to a positive balance.
