Debit and Credit

In accounting, debit refers to the left side of an account in the ledger and credit is the right hand side of an account. In simplest words, these are used to indicate whether a record in a ledger account is an addition to the account or a subtraction from the account.

The words debit and credit are also used as verbs describing the action of recording a debit or credit respectively. Therefore, debiting an account is the action to recording a debit in the account and crediting an account is the action of recording a credit in the account.

There is a common misconception that credit means increase and debit means decrease. This is true from the perspective of an owner of a bank account, but is not true in general sense. The determination of debit and credit as either increase or decrease is dependent on the ledger account in question and whether the account belongs to left or right hand side of the accounting equation.

Debit Credit Rules

Simply said, assets increase with debit and decrease with credit whereas liabilities and equity behave the opposite way. However this gets complicated in case of contra-accounts, which behave opposite to the normal accounts they relate to. So contra-accounts of assets increase with credit and decrease with debit whereas the contra-accounts of liabilities and equity behave the opposite way.

Revenues and income increase with credits and decrease with debits because they can be taken as part of equity so revenues follow the same rules as those for equity. Expenses increase with debit and decrease with credit because in a long stretch, expenses are contra-accounts to equity.

These rules are summarized below:

  • Assets and Expenses
    An increase is recorded as debit (left side)
    A decrease is recorded as credit (right side)
  • Liabilities, Equities and Revenues
    A decrease is recorded as debit (left side)
    An increase is recorded as credit (right side)
  • Contra-accounts
    Contra-accounts behave exactly in opposite way to the respective normal accounts.

Examples

  1. The owner brings cash from his personal account into the business:
    Cash (an asset) is increased thus debit Cash
    Owner capital (an equity) is increased thus credit Owners' Capital
  2. Office supplies are purchased on account:
    Office Supplies (an asset) is increased thus debit Office Supplies
    Accounts Payable (a liability) is increased thus credit Accounts Payable
  3. Wages payable are paid:
    Wages Payable (a liability) is decreased thus debit Wages Payable
    Cash (an asset) is decreased thus credit Cash
  4. Revenue is earned but not yet received:
    Accounts Receivable (an asset) is increased thus debit Accounts Receivable
    Revenue (a revenue) is increased thus credit Revenue

While it is hard to remember all these rules for so many different types of accounts, an easy way to remember them is to consider the effect of a transaction on the accounting equation. If something adds to the left hand side of the equation, record it as a debit and if something adds to the right side of the equation, record it as credit. Then for accounts that are contra, reverse this logic.

by Irfanullah Jan, ACCA and last modified on

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