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What is credit in accounting
Debit vs Credit in Accounting
Differences Between Debit and Credit in Accounting
Debit and credit are the cornerstones of accounting. If you want to learn accounting, debit and credit would be the first concepts you would learn.
In a business, many financial transactions take place in a financial period. As an accountant, it’s our job to look at the transactions, find out all the accounts, and then identify each account as either debit or credit.
Before we go in detail, we need to understand double entry system. The double entry system means every transaction would have two accounts – one would be debit and another would be credit. For example, if Company A withdraws cash of $10,000 from bank, this transaction will involve two accounts under double entry system. One would be cash and another would be bank.
In this article, we discuss Debit vs Credit in detail –
If you are new to accounting, you may have a look at this Basic Tutorial on Accounting
Debit and Credit Differences in Accounting Infographics
There are many differences between debit vs credit in accounting. Let’s have a look –
Key differences between Debit and Credit in Accounting
Now, we will see few key differences between debit and credit –
- Debit is mostly the opposite of credit. In most cases, when debit increases the account, credit decreases the account and vice versa. One of the most prominent exceptions is when cash is being introduced to business as capital. Here, both accounts are increasing, but “cash” would be debited and “capital” would be credited.
- Debit usually denotes usage of one account. And credit usually denotes the source of another account.
- We debit the account when the asset/expenses account increases and the liability/income account decreases. We credit the account when the asset/expenses account decreases and the liability/income account increases.
- Debit and credit are the cornerstones of double entry system. Without any one account, another can’t be existed.
- Debit is the effect of crediting another account and vice-versa.
Debit vs Credit in Accounting Comparitive table
|Basis for Comparison – Debit vs Credit||Debit||Credit|
|1. Definition||Debit is the use of value for a transaction.||Credit is the source of value for a transaction.|
|2. Application||Debit is used to express the increase/decrease of assets & expenses or liabilities & incomes.||Credit is used to express the increase/decrease of liabilities & incomes or assets & expenses.|
|3. In Journal||Debit is the first account that is recorded.||Credit is recorded after debit account followed by the word “To”.|
|4. Placement in T-format||It is always placed in the right side.||It is always placed in the left side.|
|5. Equation||“Assets = Liabilities + Equity” is affected by debiting one account.||“Assets = Liabilities + Equity” is affected by also crediting one account.|
|6. Balancing act||Under double entry system, debit alone can’t balance the whole transaction.||Similarly, credit also can’t balance the whole transaction without the assistance of debt account.|
|7. Example “Sales for cash”||As “cash” increases, we will debit “cash”.||As “sales” increases, we will credit “sales”.|
Debit and credit exist together like twins in accounting.
If you understand one, understanding another becomes much simpler.
The rule of debit and credit in accounting is very clear. If you can just remember what increases and what decreases, you would be able to identify which account should be debited and which account should be credited.
All you need to do is to take an example and try out. Pick any transaction of a business and try to record a journal entry. You will easily be able to understand the meaning and application of debit and credit.
Debit vs Credit in Accounting Video
This has been a guide to differences between Debit and Credit in Accounting. You may also have a look at these following articles to learn more about accounting.