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Accountancy
Key concepts
Accountant · Bookkeeping · Trial balance · General ledger · Debits and credits · Cost of goods sold · Double-entry system · Standard practices · Cash and accrual basis · GAAP / IFRS
Financial statements
Balance sheet · Income statement · Cash flow statement · Equity · Retained earnings
Auditing
Financial audit · GAAS · Internal audit · Sarbanes–Oxley Act · Big Four auditors
Fields of accounting
Cost · Financial · Forensic · Fund · Management · Tax
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Debit and credit are formal bookkeeping and accounting terms. They are the most fundamental concepts in accounting, representing the two sides of each individual transaction recorded in any accounting system. A debit transaction indicates an asset or an expense transaction, a credit indicates a transaction that will cause a liability or a gain. A debit transaction can also be used to reduce a credit balance or increase a debit balance. A credit transaction can be used to decrease a debit balance or increase a credit balance.

Contents 1 Introduction 2 Origin of the terms debit and credit 3 Principles or Rules of Debit and Credit 3.1 Examples 4 'T' Accounts 5 See also 6 References 7 External links

[edit] Introduction

Debits and credits are a system of notation used in bookkeeping to determine how and where to record any financial transaction. In bookkeeping, instead of using addition '+' and subtraction '-' symbols, a transaction uses the symbol DR (Debit) or CR (Credit). In double-entry bookkeeping debit is used for asset and expense transactions and credit is used for liability and gains transactions. For bank transactions, money in is treated as a debit transaction and money out is treated as a credit transaction. Traditionally, transactions are recorded in two columns of numbers: debits in the left hand column, credits in the right hand column. Keeping the debits and credits in separate columns allows each to be recorded and totalled independently. Where the total of the debit value amounts is lower than the total of the credit value amounts a balancing debit value is posted to that nominal ledger account. That nominal ledger account is now "balanced". An account can have either a credit value balance or a debit value balance but not both.

[edit] Origin of the terms debit and credit

The term debit comes from the Latin debitum which means "that which is owing" (the past participle of debere "to owe"). Debit is abbreviated to Dr (for debtor). The term credit comes from the Latin credere/credit meaning "to trust or believe" / "he trusts or believes" via the French credit and the Italian credito. Credit is abbreviated to Cr (for creditor). ^[1]

[edit] Principles or Rules of Debit and Credit

Each transaction consists of debits and credits for every transaction and they must be equal.

' For Every Transaction: ' 'The Value of Debits = The Value of Credits'

This also means that the accounts with debits balances will equal the total value of accounts with credit balances. You can check the arithmetical accuracy of the accounts by doing a trial balance and proving that total debits equal total credits.

The extended accounting equation must also balance: 'A + E = L + OE + R'

(where A = Assets, E = Expenses, L = Liabilities, OE = Owner's Equity and R = Revenues)

So 'Debit Accounts (A + E) = Credit Accounts (L + R + OE)'

Debits are on the left and increase a debit account and reduce a credit account. Credits are on the right and increase a credit account and decrease a debit account.

[edit] Examples

1. when you pay rent with cash: you increase rent (expense) by debiting, and decrease cash (asset) by credit.
2. when you receive cash for a sale: you increase cash (asset) by debiting, and increase sales (revenue) by credit.
3. when you buy equipment (asset) with cash: You increase equipment (asset) by debiting, and decrease cash (asset) by credit.
4. when you borrow with a cash loan: You increase cash (asset) by debiting, and increase loan (liability) by credit.

	Account	Debit	Credit
1.	Rent	100
	Cash		100
2.	Cash	400
	Sale		400
3.	Equip.	500
	Cash		500
4.	Cash	1000
	Loan		1000

[edit] 'T' Accounts

The process of using debits and credits creates a ledger format that resembles the letter 'T'. The term 'T' account is commonly used when discussing bookkeeping.

A 'T' account showing debits on the left and credits on the right.

Debits	Credits

[edit] See also

Look up debit in Wiktionary, the free dictionary.

Look up credit in Wiktionary, the free dictionary.

• Double-entry bookkeeping system

[edit] References

[edit] External links

• Debits and Credits Explanation with Examples.