What are Debit and Credit?

Meaning of Debit and Credit

Under the Double Entry System of accounting, each business transaction is recorded with dual aspects that mean debit and credit aspects. Both debit and credit originate from the Latin words. In Latin language, Debit means “Debere” and Credit means “Credere”. Therefore, Dr. is used as a brief sort of the word “Debere” and Cr. is used as a brief sort of the word “Credere”. Every business transaction involves at least two accounts for the purpose of recording, in which one account is debited and the other is credited. When we say an account is debited this means we will write an amount on the left side of this account, on the opposite hand, once we say an account is credited it means, we’ll write an amount on the proper side of this account. Debit or credit also implies an increase or decrease in an account, depending on their nature (i.e. Personal, Real or Nominal).

Rules of Debit and Credit

The rules for debit and credit depend upon the classification of accounts. These are mentioned below.

When accounts are classified on a Traditional basis

When accounts are classified into personal, real, and nominal accounts then the following three rules of accountancy are followed:

  • Personal Accounts: “Debit the Receiver, Credit the Giver”
  • Real Accounts: “Debit what Comes in, Credit what Goes out”
  • Nominal Accounts: “Debit All Expenses and Losses, Credit all Incomes and Gains”

When accounts are classified on a Modern basis

Under the Modern classification of accounts following rules of accounting are used:

Assets Accounts: The increase in assets is debited to the respective asset account while a decrease in assets is credited to the respective asset account. Suppose, a piece of machinery is purchased for Rs 5,00,000 in cash. Here, as machinery is being purchased for cash, machinery is increasing while cash is decreasing. So, an increase in machinery will be debited to Machinery Account and the decrease of cash will be credited to Cash Account.

Liabilities Accounts: The decrease in the number of liabilities is debited, while an increase is credited. For example, purchasing goods from XYZ Ltd. on credit for Rs 20,000. Here, liability is arising as payment is to be made, and accordingly, XYZ Ltd. will be credited by Rs 20,000.

Capital Accounts: When capital is brought in or introduced by the owner or partner of the firm, the Capital Account will be credited and for withdrawing from the business it will be debited. In simple terms, a decrease in Capital is debited, and an increase in the same is credited.

Revenue Accounts: When any amount is received or receivable, the respective income account will be credited. It means for an increase in income the respective income account will be credited and for a decrease, the respective income account will be debited. For example, the sale of goods for cash of Rs 10,000. In this case, the Sales Account will be credited by Rs 10,000 and Cash Account will be debited by an equal amount as an increase in an asset is debited.

Expenses Accounts: Expenses are the costs of running a business. The increase in expenses is debited, whereas, a decrease is credited. In case salaries of Rs 5,000 are paid to staff, here Salary Account will be debited as salary being expenditure is increasing and Cash Account will be credited by Rs 5,000.

Also, Read What is Account?

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