There is no standard definition for the terms debit and credit. Historically, the word "debit" derives from the Latin word debere, which means "to owe." In accounting, this has been shortened to "Dr." Similarly, the word "credit" has its historical roots in the Latin word credere, meaning "to believe." In accounting, this is often abbreviated as "Cr." In spite of all the discussion surrounding these terms, we can also say that they are the fundamental operators of accounting, which underpin the subject. Debit and credit represent two sides (columns) of an account (i.e., a Debit column and a Credit column). Debit (Dr.) involves making an entry on the left side and Credit (Cr.) involves making an entry on the right side. Today, accountants adopt practices like the use of these columns to keep records that are used on a long-term basis. They are also useful for the management in promoting effective decision-making. Debit and credit are financial transactions that increase or decrease the values of various individual accounts in the ledger. The following rules of debit and credit are applied to record these increases or decreases in individual ledger accounts. Assets are recorded on the debit side of the account. Any increase to an asset is recorded on the debit side and any decrease is recorded on the credit side of its account. For example, the amount of cash in hand on the first day of the accounting period is recorded on the debit side of the cash in hand account. Whenever an amount of cash is received, an entry is made on the debit side of the cash in hand account. Whenever an amount of cash is paid out, an entry is made on the credit side of the cash in hand account. Liabilities are recorded on the credit side of the liability accounts. Any increase in liability is recorded on the credit side and any decrease is recorded on the debit side of a liability account. For example, the amount payable to United Traders on the first day of the accounting period is recorded on the credit side of the United Traders Account. If more goods are bought from United Traders (thereby incurring an additional liability to United Traders), an entry would be made on the credit side of United Traders Account. If an amount is paid to United Traders (thereby reducing the liability to United Traders), an entry is made on the debit side of United Traders Account. Capital is recorded on the credit side of an account. Any increase is also recorded on the credit side. Any decrease is recorded on the debit side of the respective capital account. For example, the amount of capital of Mr. John on the first day of the accounting period will be shown on the credit side of John’s Capital Account. If he introduces any additional capital, an entry will be made on the credit side of his capital account. If he takes any money or goods from the business for his personal use, that will reduce his capital and therefore an entry will be made on the debit side of his account. Notice that the rules of debit and credit for asset accounts are exactly the opposite of the rules of debit and credit for liability and capital accounts. An expense is a loss and therefore results in a reduction in capital. Since a reduction in capital is recorded on the debit side of an account, all expenses are also recorded on the debit side of the relevant account. Hence, when salaries is paid to workers, we make an entry on the debit side of the salaries account. Usually, but not always, no entries are made on the credit side of the accounts kept for expenses. An income or revenue results in an increase in capital. Since increases in capital are recorded on the credit side of the capital account, all incomes are also recorded on the credit side of the relevant account. Hence, when receiving funds from any business activity, we make an entry on the credit side of the relevant income or revenue account. Usually, but not always, there will be no entries made on the debit side of the accounts kept for income and revenue. We can now summarize the rules of debit and credit for various ledger accounts as follows: Mr. John made the following transactions during January 2016: Required: How would the rules of debit and credit be applied to record the above transactions in ledger accounts?Rules of Debit and Credit
Rules for Asset Accounts
Rules for Liability Accounts
Rules for Capital Accounts
Rules for Expense Accounts
Rules for Income or Revenue Accounts
Summary
Example
Solution
Receipt of cash from Mr. Sam, a debtor
Purchase of new delivery van from Deluxe Motors Inc.
Payment of cash to United Traders
Cash taken by John for his personal use
Rules of Debit and Credit FAQs
Debit balance = assets - liabilities + capital credit balance = capital - liabilities + assets
No. The debit and credit sides of accounts can both go up or down depending on the nature of transactions recorded in such accounts.
Yes, but only if it would result in a debit balance.
Revenue/income accounts and capital accounts are classified as income or revenue account , while proprietorship, Partnership , trusts, unincorporated organizations etc. Are capitalized, so they fall under the capital account category.
The formula for debit balance in revenue or income accounts is assets - liabilities + capital. This indicates that if revenue account has a credit balance, the amount of credit will be added to capital. Therefore, if there is any increase it will lead to an increase in capital.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
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