Saturday, September 16, 2017

Understanding of debit and credit concepts as fundamental accounting bases

D ebit and credit does not automatically mean: "plus" and "minus", "good" and "bad" or "i... thumbnail 1 summary



Debit and credit does not automatically mean: "plus" and "minus", "good" and "bad" or "increasing" and "decreasing".

Debit is formal bookkeeping and accounting term that comes from the Latin word debere, which means "to owe". It falls on the positive side of a balance sheet account.

Debit represents the addition of an asset or expense or the reduction to a liability or revenue.

Account is always  debited to record a business expenses.

Asset account is always debited on purchases of asset.


A credit is an accounting entry that either increases a liability or equity account, or decreases an asset or expense account It falls on the Right side of a balance sheet account.

Debit credit rules are applied only in double entry accounting system.

Debit' and 'credit' is a recording system that ensures that the accounting equation always remains in balance after each and every transaction.

Assets = Liabilities + Equity. The Venetian merchants that developed this system 500 years ago decided that increases on the 'assets' side would be called a 'debit' and increases on the 'liabilities' and 'equity' side would be called a 'credit' wbith corresponding 'debit' and 'credit' entries for decreases. 

If every transaction is recorded with an equal amount for the 'debit' and the 'credit', then the accounting equation will always remain in balance. 

There are only five broad categories you need to grasp.
  • Assets
  • Liabilities
  • Shareholders (aka Owners) Equity
  • Revenue
  • Expenses

A debit (DR) isn't always increasing.  A credit (CR) isn't always decreasing.  Don't think of it in these terms, but rather in the context of the five categories above.

Debits will always increase for Assets and Expenses.  Credits have the opposite effect.

Credits will always increase for Liabilities, Shareholders' Equity and Revenue.  Debits will have the opposite effect.

  1. You could classify an account as either real, personal, or nominal.
  2. Real accounts represent your assets like cash, land, machinery, etc.
  3.  Personal accounts represent persons (individuals, corporations, etc.) like suppliers, customers, bankers, borrowers, etc.
  4.  Nominal accounts represent incomes and expenses like rent, salary, interest, etc.

When you have to deal with a transaction, think of the accounts that it will involve. Once you have identified which accounts will be involved, you classify them as above.

For each of the aforementioned categories, you have the three Golden rules.
  1. Real accounts: Debit what comes in, credit what goes out
  2.  Personal accounts: Debit the receiver, credit the giver
  3.  Nominal accounts: Debit all expenses and losses, credit all incomes and gains.