Debits & Credits in Accounting
What are debits and credits?
Debit and Credit are the respective sides of an account.
Debit refers to the left side of an account.
Credit refers to the right side of an account.
In a typical accounting ledger (often referred to as a T-Account) the debit and credit sides are split horizontally as shown below:
|XYZ Receivable A/C|
|Debit Side||Credit Side|
|Debit Entries account for:||Credit Entries account for:|
|Increase in assets||Decrease in assets|
|Increase in expenses||Decrease in expenses|
|Decrease in liabilities||Increase in liabilities|
|Decrease in income||Increase in income|
|Decrease in equity||Increase in equity|
As with accounting ledgers, all accounting statements are based on the rules of debit and credit. For example, in a balance sheet, assets are reported on the debit side whereas liabilities and equity are presented on the credit side. Although traditional accounts and statements are presented in a T-Account format as above (which makes understanding debits and credits a bit easier for beginners) many accounts and statements nowadays are reported in a vertical format.
But fear not! As long as you master the rules of debit and credit, you shall have no problem in understanding their application and presentation.
Record the debit and credit entries of the following transactions:
a) Purchase of an office building for $1 million via funds transfer
b) Bonus payable to various employees amounting $5 million
c) Credit Sales during the period amounting $7 million
d) Issuance of ordinary shares at par for $10 million
a) Purchase of an office building
|Debit||Office Building||1,000,000||Increase in Asset|
|Credit||Bank||1,000,000||Decrease in Assets|
b) Performance Bonus
|Debit||Salaries, wages and benefits||5,000,000||Increase in Expense|
|Credit||Bonus Payable||5,000,000||Increase in Liabilities|
c) Credit Sales
|Debit||Accounts Receivables||7,000,000||Increase in Asset|
|Credit||Sales Revenue||7,000,000||Increase in Income|
d) Issuance of ordinary shares
|Debit||Bank||10,000,000||Increase in Asset|
|Credit||Share Capital||10,000,000||Increase in Equity|