What is Debit and Credit?
- Debit means left and credit means right.
- “Debit” is abbreviated as “Dr” and “Credit” as “Cr”.
- The terms originated from the Latin terms “debere” or “debitum” which means “what is due”, and “credere” or “creditum” which means “something entrusted or loaned”.
- Debit indicates that an amount should be entered on the left side of an account.
- Credit indicates that an amount should be entered on the right side of an account
Assets
- Asset normally show a debit balance.
- An increase in an asset account is recorded with a debit amount.
- A decrease in an asset account is recorded with a credit amount.
Example
Company purchased Machinery worth ₹50,000. The company should record a debit of ₹50,000 in its asset account i.e., Machinery (Since this asset is increased) and it should record a credit of ₹50,000 in its other asset account i.e., cash (since this asset decreases).
Liabilities
- Liabilities normally show a credit balance.
- An increase in liabilities is recorded with a credit amount
- An decrease in liabilities is recorded with a debit amount
Example
If a company takes a bank loan of ₹5,00,000, in this case, asset increases (i.e., cash), and on the other hand liability also increases (i.e., loan, it is a liability to the company), therefore we need to credit loan account and debit cash.
While repaying the loan, the company’s assets as well as liability decreases, therefore, the debit loan account and credit cash account.
Expenses
- All expenses show a debit balance.
- Expenses have to be debited when it increases
- Expenses have to be credited when it decreases
Example
Company-paid salary to its employees ₹30,000. Salary is an expense, it should be debited. On the other hand, cash is an asset, and cash goes out of business and there is a decrease in cash (i.e., asset), therefore credit cash account.
Incomes/Gains
- All incomes show a credit balance
- Incomes has to be debited, when it decreases
- Incomes has to be credited, when it increases
Example
The company receives a commission of ₹500, commission is an income to the business. Here there is an increase in the income, therefore, credit commission received account.
Stockholder’s Equity
- Stockholder’s Equity shows a credit balance
- Stockholder’s Equity has to be debited, when it decreases
- Stockholder’s Equity has to be credited, when it increases
Example
Dividend declared by the corporation to the shareholders will mean a debit and Retained earnings has to be credited.
Gains
- All gains show a credit balance
- Gains have to be debited when it decreases
- Gains have to be credited when it increases
Losses
- All losses show a debit balance
- Losses have to be debited when it increases
- Losses have to be credited when it decreases
Basic rules for debit account and credit account
| Debit | Credit | |
|---|---|---|
| Personal Accounts | Receiver | Giver |
| Real Accounts | What comes in | What goes out |
| Nominal Accounts | Expenses & Losses | Incomes & Gains |
Account elements with their normal balance
| Account Element | Normal Balance |
|---|---|
| Assets | Debit |
| Liabilities | Credit |
| Capital | Credit |
| Withdrawal | Debit |
| Income | Credit |
| Expense | Debit |
Debit and credit items
| Kind of Account | Debit | Credit |
|---|---|---|
| Assets | Increase | Decrease |
| Liabilities | Decrease | Increase |
| Owner's Equity | Decrease | Increase |
| Expenses | Increase | Decrease |
| Incomes | Decrease | Increase |
| Withdrawals | Increase | Decrease |
