Meaning of Credit and Debit:
- While entering business transactions, debit and credit affect two types of accounts. They are alluded to in the books of accounts as Cr. for credit and as Dr. for debit.
- The right-hand side of a record is named as the credit side and the left-hand side of a record is named as the debit side.
- These terms address either increment or decline in a specific record, dependent on the nature of a record.
- If an entry is recorded on the credit side of a record, it is supposed to be credited to the record and if an entry is recorded on the debit side of a record, it is supposed to be debited to the record.
Rules of Debit and Credit:
According to the Double Entry System of bookkeeping, each business transaction or exchange has two angles. One of them is the income or receiving aspect known as the debit perspective, and the other is the outgoing or giving aspect known as the credit aspect.
Based on these two viewpoints under the Double Entry System of Accounting, vital Rules of Credit and Debit are outlined, dependent on the idea of different accounts or records to effectively choose when to debit the record and when to credit the record. This is to guarantee the right impact and treatment for a specific exchange.
The business transaction or exchange is separated into accounts while doing the bookkeeping. The commonly affected accounts are-
- Expenses
- Liabilities
- Equity
- Revenue
- Assets
How Debit and Credit Affects Business Accounts?
The table below shows a brief overview of how debit and credit transactions affect business.
| Decreases in the account | Increases in the account |
| Expenses |
Credit | Debit |
| Liabilities |
Debit | Credit |
| Equity |
Debit | Credit |
| Revenue |
Debit | Credit |
| Assets |
Credit | Debit |
The Golden Rules:
The golden rules of accounting or the guidelines of bookkeeping oversee the standard of credit and debit. Before we analyse further, we should know the three renowned brilliant principles of bookkeeping:
Firstly: Debit what comes in and credit what goes out.
Secondly: Debit all expenses and credit all incomes and gains.
Thirdly: Debit the Receiver, Credit the giver.
In brief, the credit is ‘Cr’, and the debit is ‘Dr’. In this way, a ledger account, otherwise called a T-account, comprises different sides. As discussed before, the left-hand side (Dr) records the charge exchange and the right-hand side (Cr) records credit exchanges.
Assume a business buys capital assets with liquid assets such as cash, this exchange will increase the capital asset account and decrease the cash account since capital assets come in and cash leaves the business. Further, this increment in a capital asset account and the reduction in cash account are to be recorded in the capital asset account and cash account separately. This transaction will likewise be recorded in the ledger account.
Difference between Debit and Credit:
Credit | Debit |
| Meaning |
Credit is passed when there is a decrease in assets or an increase in liabilities and owner’s equity. | Debit is passed when an increase in asset or decrease in liabilities and owner’s equity occurs. |
| Personal Account |
Credit the giver | Debit the receiver |
| Nominal Account |
Credit all incomes and gains | Debit all expenses and losses |
| Real Account |
What goes out | What comes in |
| Appears on which side of a T-format ledger account |
Right side of the T ledger account | Left side of the T ledger account |
FAQs
Difference between Debit and Credit:
What is the difference between debit and credit? ›
What's the difference? When you use a debit card, the funds for the amount of your purchase are taken from your checking account almost instantly. When you use a credit card, the amount will be charged to your line of credit, meaning you will pay the bill at a later date, which also gives you more time to pay.
What is debit and credit in Golden Rules? ›
The following are the rules of debit and credit which guide the system of accounts, they are known as the Golden Rules of accountancy: First: Debit what comes in, Credit what goes out. Second: Debit all expenses and losses, Credit all incomes and gains. Third: Debit the receiver, Credit the giver.
How do you remember the difference between debit and credit? ›
DC are the headers left to right. ADE in the left column and LER in the right. Debits are always on the left. Credits are always on the right.
What is the difference between DR and CR in accounting? ›
CR is a notation for "credit" and DR is a notation for debit in double-entry accounting. Credit is a term that's used to mean "what is owed" and debit means "what is due."
Is debit money in or out? ›
A debit to your bank account occurs when you use funds from the account to buy something or pay someone. When your bank account is debited, money is taken out of the account. The opposite of a debit is a credit, in which case money is added to your account.
Is credit or debit your own money? ›
Remember, paying with a credit card means borrowing money from the card issuer, while using a debit card means spending your own money from your checking account.
What is debit and credit with an example? ›
For example, when two companies transact with one another say Company A buys something from Company B then Company A will record a decrease in cash (a Credit), and Company B will record an increase in cash (a Debit). The same transaction is recorded from two different perspectives.
How does the golden rules work? ›
The Golden Rule guides people to choose for others what they would choose for themselves. The Golden Rule is often described as 'putting yourself in someone else's shoes', or 'Do unto others as you would have them do unto you'(Baumrin 2004).
How do you remember debits and credits in accounting? ›
The accounting equation must always be in balance, the left side (assets) must always be equal to the right side (liabilities and equity). An increase to the left side of the equation is a debit (debit means left), and an increase in the right side of the equation is a credit (credit means right).
Debits (often represented as DR) record incoming money, while credits (CR) record outgoing money.
What is a credit and debit in accounting for dummies? ›
Debits are recorded on the left side of an accounting journal entry. A credit increases the balance of a liability, equity, gain or revenue account and decreases the balance of an asset, loss or expense account. Credits are recorded on the right side of a journal entry. Increase asset, expense and loss accounts.
What is debit in simple terms? ›
A debit is a record of the money taken from your bank account, for example, when you make a payment. The total of debits must balance the total of credits. Synonyms: payout, debt, payment, commitment More Synonyms of debit.
Does CR mean I owe money? ›
CR stands for credit, so when you see this on a bill or bank statement it means you are in credit – in other words, you have surplus money in your account. In contrast, DR stands for debit which is the amount you owe on a bill, such as a credit card bill. Or the amount you are overdrawn on a bank statement.
Does Dr. mean I owe money? ›
A "Dr" balance means a debit balance which is an amount due for payment, whilst a "Cr" balance means a credit balance which indicates that no payment is due.
Whats the difference between credit or debit? ›
Credit cards give you access to a line of credit issued by a bank, while debit cards deduct money directly from your bank account. Credit cards offer better consumer protections against fraud compared with debit cards linked to a bank account.
Should I use credit or debit? ›
A credit card can protect your purchases from defects and failures, and handle disputes quickly without putting your money at risk, while a debit card can help you stick to your budget and keep you from increasing debt. Ultimately, it is up to you to decide which option is best for your financial situation.
Is debit positive or negative? ›
A Mathematical Understanding of Debits & Credits
A simple way to distinguish between the two is to know that a debit entry always adds a positive number to the ledger, and a credit entry always adds a negative number.
