27/06/2022Accounting , Bookkeeping , Finance
Many people beginning their finance education get confused about the difference between debits and credits. Even the laymen also become perplexed over the question of what is debit and credit most of the time.
On the other hand, this confusion might cost you many pounds if used incorrectly and entered the values in the wrong accounts. So, financial managers, accountants and bookkeepers take special care to produce and maintain accurate financial records.
If you are also one of those people mixing up these two terms, then this guide is right for you. In this article, we will inform you about the debits and credits separately and then highlight the difference between these two terms.
Moreover, we will discuss the use if debits and credits in bookkeeping and accounts records and how to use them. So, let’s start with our basic understanding of debits and credit.
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Double Accounting Procedure in Accounting
Mostly, the confusion between debit and credit arises due to the double-entry procedure in the bookkeeping and balance sheets. To ensure accuracy and avoid any discrepancy, the accountants enter a value into accounts at the same time.
One value is added as the debit and another one as the credit simultaneously. When an entry is added to to the debit accounts, it is subtracted simultaneously from the credit account. Vice versa, any value added to the credit accounts is subtracted from the debit account. This is the reason most people get confused about these terms.
The following types of accounts are used for maintaining the records of a firm:
- Asset Accounts
- Expense Accounts
- Liability Accounts
- Equity Accounts
- Revenue
A value increased in one account is automatically deducted from another account. For this, accuracy needs to be ensured to avoid any differences in the records.
What is Debit in Bookkeeping?
A debit is a value coming inside your accounts, ultimately increasing the value of your assets. On the other hand, the debits reduce the liabilities of an organisation.
In other words, all the money or cash coming into the account of a company is known as the debit and it is added as a debit entry to a balance sheet. For example, it is added to the assets or expense accounts.
At the same time, it is subtracted from the equity or revenue accounts lowering the liabilities of a company. The debit is the money earned by the company. For example, a company has received the payments from the clients and it will be a part of the debit accounts.
The following types of accounts increase the value of debit accounts:
Dividends (Draws)
Expenses
Assets
Losses
You can remember them as DEAL as it will make it easier for you to add values as a debit to these accounts. The debit entries are made using the abbreviation of the dr. in the records.
What is Credit in Bookkeeping?
Credit is the opposite of a debit in finance. It is a value or money going out of the accounts of a company. It means to say the credit in bookkeeping reduces the assets and increases the liabilities.
The credits are a crucial part of a balance sheet and they represent the liabilities of a company. These are the payments a company has yet to make in future as the company has purchased some raw material or achieved a loan from a bank.
Gains
Income
Revenues
Liabilities
Stockholders’ (Owner’s) Equity
Remembering as GIRLS would make the entry process convenient and error-free for you. The credits are entered with the abbreviation of Cr. in the sheets.
What is the difference Between Debits and Credits?
Both the debits and credits are the transactions added to the accounts of a company. Every transaction has two sides. One is the transaction in which a company pays out of its accounts, reducing the money in that account. This is known as the Credit.
On the other hand, a company achieves or earns money from the sale of products or services or by getting loans. This part of the transaction increases the money in the accounts of a firm. This increase in money is added as a debit to the company’s balance sheet.
| Accounts | Debit | Credit |
| Asset Account | Increases | Decreases |
| Expense Account | Increases | Decreases |
| Liability Account | Decreases | Increases |
| Equity Account | Decreases | Increases |
| Revenue | Decreases | Increases |
| Entry | Recorded on the left | Recorded on the right |
All the entries counted as an asset, cash or loan are added as debits. When a loan is paid back, it is credited. Similarly, when a company needs cash, it sells some of its assets. These assets will be credited and the cash received will be added as the debit.
The Final Thoughts
In conclusion, debit and credit are the two sides of the same coin. The debit is a value increasing the total assets or cash of a company. On the contrary, the credits are the values reducing the assets and cash of a company.
So, it is very important to learn what is debit and credit and what is the difference between them. Moreover, you need to take care of how to increase and decrease the debit and credit in different types of accounts.
Are you wondering about the difference between debit and credit? Feel free to ask us any questions and get consultation services at CruseBurke by calling us at 02086868876.
Disclaimer: All the information provided in this article on what is the difference between debit and credit including texts and graphics is general in nature. It does not intend to disregard any of the professional advice.
