Accounting

Debit& Credit

The basic

Every business has several transactions that occur each day. Each of these transactions is examined by accountants and recorded. In the first steps of accounting, accounts are divided into T accounts. Visually, it has a "T" shape and consists of two sides: debit and credit, it helps accounting professionals see the effects of transactions on a account and allows to keep a good control and management of the finances of a company.

What are Debits & Credits

Credit and debit are two of the most basic terms used in accounting.

While debit is a transaction that increases the balance of asset and expense accounts. E.g., your bank account is considered an asset, while rent, office supplies, utilities, and payroll are considered expenses.

Credit, on the other hand, is a transaction that increases the liability and equity accounts. Accounts payable and loans are considered liability accounts, and capital is considered an equity account.

On the left side of the account is the debit and on the right side is the credit. The best way to remember debits and credits is to remember for every debit, there is a credit, and for every credit there is a debit. One entry increases the value of an account, while another entry decreases the value of an account. When the total debits of a transaction are added to the total credits of the same transaction, the final result must be zero. This means that the transaction is balanced.

Example:

Whenever the business creates a debit, a credit must be created elsewhere.

A company sold a total of $500.00 in shirts, on the debit side, its income must increase by $500.00, while on the credit side, the inventory account must decrease by $500.00.

This reflects that, despite the exchange of money, the amount of the transaction remains constant. Therefore, if you notice that the credit and debit amounts do not agree, you knows that there is an error.

Summary

Debits and credits are one of the fundamental bases and tools in accounting that establishes the basis for the preparation of financial statements, such as: balance sheet, income statement, and statement of changes in cash flow. A debit in accounting increases some accounts such as assets and expenses. A credit in accounting increases some accounts such as profit and income. Despite their differences, credit and debit perform the same function of controlling financial transactions.

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