Concept of Debit and Credit:
Debit and Credit are two important parts of double-entry system. According to this method, every transaction has two sides—one debit and the other credit. Each transaction is recorded with equal amounts of debits and credits, which balance the financial accounts.
Debit: Used to indicate an increase in the value of an account or a decrease in a liability. Generally, debits increase compared to assets, expenses, and owners.
Credit: Used to denote a decrease in the value of an account or an increase in a liability. Generally, credit increases with respect to liabilities, income, and ownership
Chart of Debit and Credit:
|
Account type |
Debit |
Credit |
|
Assets |
Increases |
Decreases |
|
Liabilities |
Decreases |
Increases |
|
Revenue |
Decreases |
Increases |
|
Expenses |
Increases |
Decreases |
|
Owner’s Equity |
Decreases |
Increases |
Debit and Credit with Examples:
Example 1: Purchase of machine in cash.
If you purchase a machine for $50,000 and pay in cash, then:
Machine Account: This is an asset, and the asset is increasing, so it will be debited.
Cash Account: Cash is decreasing, so it will be credit.
Journal Entries: Date Particulars Debit ($) Credit ($)
———————————————————————————————————
01/04/20XX Machinery A/C Dr. $50,000
To Cash A/C Cr. $50,000
(Narration: Purchased machinery for cash)
Analysis:
The machine account is debited because the business assets have increased.
The cash account is credited because cash has decreased.
Example 2: Credit sales Let’s say you sell goods for $20,000, but the money is available later. In that case:
Accounts Receivable: This is an asset (the money you are going to receive), and it is increasing, so it will be a debit.
Sales: This is the income account, and the income is increasing, so it will be credit.
Journal Entries: Date Particulars Debit ($) Credit ($)
———————————————————————————————————
05/04/20XX Accounts Receivable A/C Dr. $20,000
To Sales A/C Cr. $20,000
(Narration: Goods sold on credit)
Analysis:
Accounts receivable is debited because you will receive the money later, it is an asset.
Sales account is credited because of increase in income through sales.
Example 3: Payment of electricity bill You paid an electricity bill of $3,000 in cash:
Electricity Expense: This is an expense, and the expense is increasing, so it will be a debit.
Cash: Cash is decreasing, so it will be credit.
Journal Entries: Date Particulars Debit ($) Credit ($)
———————————————————————————————————
08/04/20XX Electricity Expense A/C Dr. $3,000
To Cash A/C Cr. $3,000
(Narration: Paid electricity bill by cash)
Analysis:
Electricity consumption has been debited because it is an expense, which has increased.
Cash is credited because cash has decreased.
General Rules of Debit and Credit:
Debit increases by:
Assets
Expenses
Credit increases by:
Liabilities
Revenue
Owner’s Equity
More Resources
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