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.
Explanation
In accounting, every account or statement (e.g. accounting ledger, trial balance, profit and loss account, balance sheet) has 2 sides known as debit and credit.
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 | |||||||
Date | Particulars | $ | Date | Particulars | $ | ||
01-Dec-14 | Sales | 12,500 | 10-Dec-14 | Discount allowed | 500 | ||
10-Dec-14 | Bank | 12,000 | |||||
12,500 | 12,500 | ||||||
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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 |
Assets, expenses, liabilities, income & equity are the 5 elements of financial statements. For explanation and examples of the various elements, please refer elements of financial statements section.
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.
Example
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
Account | $ | Effect | |
Debit | Office Building | 1,000,000 | Increase in Asset |
Credit | Bank | 1,000,000 | Decrease in Assets |
b) Performance Bonus
Account | $ | Effect | |
Debit | Salaries, wages and benefits | 5,000,000 | Increase in Expense |
Credit | Bonus Payable | 5,000,000 | Increase in Liabilities |
c) Credit Sales
Account | $ | Effect | |
Debit | Accounts Receivables | 7,000,000 | Increase in Asset |
Credit | Sales Revenue | 7,000,000 | Increase in Income |
d) Issuance of ordinary shares
Account | $ | Effect | |
Debit | Bank | 10,000,000 | Increase in Asset |
Credit | Share Capital | 10,000,000 | Increase in Equity |
If you face any problem in understanding the double entries, please refer double entry accounting section.