Debit and credit: double entry accounting method
In accounting parlance, the left side of an account is called debit side. Therefore, an account with entries on the left greater in total than the entries on the right is said to have a debit balance. The following accounts typically have debit balances:
(a) Accounts receivable
(c) Fixed assets
The right side of an account is called credit side, and an account whose total of entries on the right is greater than the total of its entries on the left is said to have a credit limit. The following accounts typically have credit balances:
(a) Accounts payable
(b) Owners’ equity
(c) Documents to pay
Words debit Y credit they are sometimes used as nouns. An entry to the right is a credit and an entry to the left is a debit.
Debit Y credit they can also be used as verbs. To increase an asset account, you would debit that account. To increase a capital account, I would credit it.
To lower an asset account, you would credit it; To increase a capital account, I would credit it.
In everyday language, the word credit has a favorable connotation and the word debit an unfavorable connotation. This is not true in accounting language.
Debit and credit are often abbreviated as “Dr.” and CR”. For any transaction, the total of the Dr. amounts is equal to the total Cr. quantities. After each transaction, the total of Dr. balances must equal the total of cr. scales.
An increase in the owners’ equity will be recorded as a Cr.
Accounts are kept not only of the items that appear on the balance sheet, but also of those that appear in the income statement. Therefore, income and expense accounts are kept.
Since owners ‘equity accounts have Cr. Balances, and since income is an increase in owners’ equity, an increase in income must be a Cr. And a decrease must be a Dr. Sales is a income account.
Similarly, an increase in spending must be a Dr. and a decrease a Cr. Cost of goods sold and wages and salaries are expense accounts.
In the equation, Assets = Liabilities + Owners ‘Equity, you will find the assets on the left side and the liabilities and owners’ equity on the right side. Therefore, we can say that assets are normally charged on the debit side and liabilities and net worth will normally be credited on the credit side.
The following are the rules regarding debit and credit:
Debit: (a) asset received
(b) liabilities paid
(c) investment or capital
(d) cost or losses
Credit: (a) gifted assets
(b) liabilities incurred
(c) withdrawals or sweepstakes
(d) income or earnings
For example, Mr. John Smith invested $ 20,000 in his bedding business. The company charged $ 20,000 in cash for the value received and credited Smith, Capital for $ 20,000 for the value (the right to claim) awarded.
Bed Linens Company purchased $ 10,000 worth of bedding sets and pillowcases on account. The accountant charged the purchases (inventory cost) for $ 10,000 and credited the accounts payable (liability), $ 10,000.
Business transactions involve exchanges of values, the received value and the separate value. The received value is the debit and the separated value is the credit. It is obvious that a transaction has a double effect. This is called the double entry method of accounting for recording a business transaction.