Get To Know Debit And Credit Terms In Accounting

What are debits and credits? What does debit mean? In the world of accounting, credit and debit are components of the amount of each transaction value that must be recorded.

To understand what debit, also what credit is, read on this article to get to know this important terms in accounting.

Knowing and understanding the terms in Accounting will make you more familiar with Accounting.

Especially for those of you who want to learn the basics of Accounting or those of you who want to know more about Accounting for your business needs.

So What Are Debits And Credits? What does debit mean? And what does credit mean?

What do debit and credit mean?

Every business transaction that occurs must be recorded in your books.

The transaction will be recorded in two accounts: debit and credit accounts.

The meaning of debit is an accounting entry that increases an asset or expense account, reduces a liability or equity account.

The debit position is on the left in the trial balance or bookkeeping.

In contrast, a credit is an accounting entry that increases a liability or equity account, decreases an asset or expense account.

The credit position is on the right in the trial balance or bookkeeping.

In the world of double-entry bookkeeping, the role and meaning of debits and credits is to track business transactions across the various types of accounts used.

This is done so that the journal entries in the general ledger of the account are valid, where the total debits must equal the total credits.

In other words, the total entries on the left side must equal the total entries on the right side.

Sometimes, you need to place more than one account in a debit or credit position, so that both sides of the Journal entry are equal.

Most people are familiar with the terms debit and credit outside the context of accounting.

For example, people think that debit can be referred to as funds taken from a bank account.

On the other hand, credit may mean money that is available for spending or borrowing from a bank.

Following the assumption of people then we can summarize like this: debit and credit are to represent the terms in our bank account statement.

For example, if a person has a debit card and a credit card that allows the bank to issue money directly from a checking account (debit card) or from a line of credit with the bank (credit card).

So, debit or debit and credit in an accounting context will mean a little different from the statements in your passbook.

The use of this term in the accounting world is more for the purposes of accounting processes in companies or businesses.

Some Examples of Account Placement in Debit or Credit Positions Are As Follows

By understanding this example, you can better understand what debits and credits are in Accounting.

Understanding the terms: credit or debit accounting means that it will make it easier for you to learn accounting, as well as understand the use of existing accounting applications.

The first example of the use of credit and debit is as follows

You have a balance of $ 5,000.00, then you buy office supplies worth $ 1,000,000 using funds from this account.

This means that the Bank account is the source account, and the $ 1,000,000 will be recorded as a credit on the right side of the T account.

Office Supplies Expense Account is the destination account debited on the right side.

Cash & Bank Account
debitCredit
$ 5.000.000(1)         –
          –$ 1,000,000

(2)

Office Supplies Cost
debitCredit
$ 1,000,000 (2)           –

Notes:

  • (1) Cash & Bank account balance nominal
  • (2) Nominal Costs incurred for office supplies.

In the T account above, the transactions that make the first journal entry are labeled “(1)”, and the transactions from the second journal entry are labeled “(2)”.

This second journal entry is the correct entry because the total debit is $ 1,000,000 which is debited from the office supplies expense account on the left side, the same as the credit amount of $ 1,000,000 that is credited to the Bank Account on the right side.

The second example of the use of credit and debit is as follows

Now let’s look at an example where we are asked to record several debit and credit entries.

You pay off the loan from the bank using funds from the Bank Account.

The payment consists of $ 1,500,000 principal and $ 500,000 interest (total $ 2,000,000).

First of all, you have to make an entry on the right side (Credit) of $ 2,000,000 for the source account, which in this case is the bank account.

Then, you should take note of some entries in this case.

The first is the Bank Loan account and the second is the Interest Expense account.

You will enter a debit of $ 1,500,000 under the Bank loan account, and enter a debit of $ 500,000 under the interest expense account.

Cash & Bank Account
debitCredit
$ 5.000.000
$ 1,000,000(3)
$ 2,000,000(3)
Bank Loan
debitCredit
$ 1,500,000(3)
Interest expense
debitCredit
$ 500,000(3)

The total credits for this journal entry add up to $ 2,000,000, and the total debits increase to $ 2,000,000 obtained from ($ 1,500,000 + $ 500,000), making it a valid journal entry with multiple debits and credits.

Account Balance: What is Debit Balance and Credit Balance?

The account balance is the difference between the total debits and total credits of the account.

When the total debits are greater than the total credits, the account has a debit balance, and when the total credits exceed the total debits, the account has a credit balance.

When a trial balance is drawn, the total debits are to equal the total credits across the company as a whole (see below for a sample trial balance).

If they are not the same, then you know that an error has occurred.

Let’s create a trial balance for the transactions listed in Example 1-2 above.

First, here is a summary of the transactions that will result in the trial balance:

Cash & Bank Account
debitCredit
$ 5.000.000
$ 1,000,000
$ 2,000,000
$ 2,000,000
Bank Loan
debitCredit
$ 1,500,000
$ 1,500,000
Interest expense
debitCredit
$ 500,000
$ 500,000
Owner’s Equity
debitCredit
$ 5.000.000
$ 5.000.000
Office Supplies Cost
debitCredit
$ 1,000,000
$ 1,000,000

Then the trial balance report will be as below:

Trial balance
AccountdebitCredit
Bank cash$ 2,000,000
Bank Loan$ 1,500,000
Interest expense$ 500,000
Equity$ 5.000.000
Office Supplies Cost$ 1,000,000
Total$ 5.000.000$ 5.000.000

The total debits are in the trial balance of $ 5,000,000 equal to the credit amount of $ 5,000,000 as they should be.

However, you will notice that some accounts have more debit amounts, while others have more credits.

Accounts that have debit balances for Bank Accounts, Bank Loans, Interest Expense, and Office Expense.

An equity account is the only account that has a credit balance.

Trial balance is the standard format used by accountants to prepare financial statements (balance sheet and income statement).

This means enabling the company’s financial activities to be shared in an easy-to-understand way.

What type of account usually has a debit & credit balance?

Debit balances generally occur in certain types of accounts, while credit balances generally occur in other accounts.

See the chart below for the normal state (Debit or debit means for an account that usually carries a debit balance, and Credit means for an account that usually has a credit balance) of the five main account types.

Account TypedebitCredit
AssetIncreaseReduce
LiabilityReduceIncrease
Equity/capitalReduceIncrease
IncomeReduceIncrease
CostsIncreaseReduce

The calculation above is a simple example of a debit and credit accounting that occurs involving a few transaction items.

Of course, if a business has been running and has many transactions, the financial records will be even more complicated.

However, if the calculation looks complicated, it doesn’t hurt for you to use accounting software that can calculate finances properly and accurately.

With the Accounting Software, you will get all the conveniences of recording bookkeeping in the accounting process, safely, quickly, and practically.

In conclusion, credit and debit means every incoming and outgoing transaction that needs to be recorded in the books. The total entries on the left side must equal the total entries on the right side.

Now that you understand what debit and credit are, what does debit or debit mean? What is clear, in the world of accounting, is that credit and debit are components of the magnitude of each transaction value that must be recorded.

Hope this helps, and don’t forget to share on social media!


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