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Difference Between Debit and Credit

Debit vs Credit

The art of recording, classifying, summarizing, and interpreting financial transactions, money, and events, also referred to as accounting, dates as far back as 7,000 years ago. Accounting methods then were very primitive and used only to record the increase and decrease in livestock. It gradually evolved as businesses expanded and trade became prevalent, with businessmen dealing with other businessmen from different places and dealing in a variety of products and services. In 14th century Italy, the double entry accounting system was developed to cope with the fast-growing business environment involving numerous investors.

The double entry accounting method, or bookkeeping system, involves a set of rules for the recording of financial transactions. Each transaction is recorded twice as two accounts with two entries; a debit entry and a credit entry in the journal or ledger. There are five groups of accounts: assets (receivables, equipment, land, inventory), liabilities (payables, loans, overdrafts), revenue or income (sales, rent, and interest income), expense (salaries, wages, electricity, telephone, bad debts), and equity (capital, drawings, funds).

Each of these accounts must have two columns in the chart of accounts: a debit column which is located on the left side and a credit column which is on the right side. Whenever there is a debit entry on one account, there must be a corresponding credit entry on another account. For example: when a store receives stock from a supplier, there should be a debit in the supplies account (asset) while a credit should appear in the accounts payable (liability). Once the store pays the supplier, the accounts payable column should be debited while the cash should be credited to show its decrease as a result of the payment.

Debits increase the balance of assets and expense accounts and decrease the balance of liability, revenue, and capital accounts. Credits decrease the balance of assets and expense accounts and increase the balance of liability, revenue, and capital accounts. There is also a traditional approach to accounting which classifies accounts into: real accounts (assets), personal accounts (liabilities and equity which represents business investors), and nominal accounts (expenses, revenues, gains, and losses).

This approach has these three golden rules:

For real accounts, what comes in is debited while what goes out is credited.
For personal accounts, the recipient is debited while the payor is credited.
For nominal accounts, expenses and losses are debited while income and gains are credited.

Summary:

1.A debit is an account entry which is located on the left column of a ledger or journal while a credit is an account entry which is located on the right column of a ledger or journal.
2.Debits and credits are features of the double entry system of accounting. For every credit or debit there should be a corresponding opposite entry.
3.A debit on assets and expenses will increase their balances while a credit will decrease their balances.
4.A debit on liabilities, revenue, and capital will decrease their balances while a credit will increase their balances.


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