Debit vs Credit
The art of recording, classifying,
summarizing, and interpreting financial transactions, money, and events,
also referred to as accounting, dates as far back as 7,000 years ago.
Accounting methods then were very primitive and used only to record the
increase and decrease in livestock. It gradually evolved as businesses
expanded and trade became prevalent, with businessmen dealing with other
businessmen from different places and dealing in a variety of products
and services. In 14th century Italy, the double entry accounting system was developed to cope with the fast-growing business environment involving numerous investors.
The double entry accounting method, or
bookkeeping system, involves a set of rules for the recording of
financial transactions. Each transaction is recorded twice as two
accounts with two entries; a debit entry and a credit entry in the
journal or ledger. There are five groups of accounts: assets
(receivables, equipment, land, inventory), liabilities (payables, loans,
overdrafts), revenue or income (sales, rent, and interest income),
expense (salaries, wages, electricity, telephone, bad debts), and equity
(capital, drawings, funds).
Each of these accounts must have two
columns in the chart of accounts: a debit column which is located on the
left side and a credit column which is on the right side. Whenever
there is a debit entry on one account, there must be a corresponding
credit entry on another account. For example: when a store receives
stock from a supplier, there should be a debit in the supplies account
(asset) while a credit should appear in the accounts payable
(liability). Once the store pays the supplier, the accounts payable
column should be debited while the cash should be credited to show its
decrease as a result of the payment.
Debits increase the balance of assets
and expense accounts and decrease the balance of liability, revenue,
and capital accounts. Credits decrease the balance of assets and
expense accounts and increase the balance of liability, revenue, and
capital accounts. There is also a traditional approach to accounting
which classifies accounts into: real accounts (assets), personal
accounts (liabilities and equity which represents business investors),
and nominal accounts (expenses, revenues, gains, and losses).
This approach has these three golden rules:
For real accounts, what comes in is debited while what goes out is credited.
For personal accounts, the recipient is debited while the payor is credited.
For nominal accounts, expenses and losses are debited while income and gains are credited.
For personal accounts, the recipient is debited while the payor is credited.
For nominal accounts, expenses and losses are debited while income and gains are credited.
Summary:
1.A debit is an account entry which is
located on the left column of a ledger or journal while a credit is an
account entry which is located on the right column of a ledger or
journal.
2.Debits and credits are features of the double entry system of accounting. For every credit or debit there should be a corresponding opposite entry.
3.A debit on assets and expenses will increase their balances while a credit will decrease their balances.
4.A debit on liabilities, revenue, and capital will decrease their balances while a credit will increase their balances.
2.Debits and credits are features of the double entry system of accounting. For every credit or debit there should be a corresponding opposite entry.
3.A debit on assets and expenses will increase their balances while a credit will decrease their balances.
4.A debit on liabilities, revenue, and capital will decrease their balances while a credit will increase their balances.
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