Differences Between Debit and Credit

They are the cornerstones of accounting. If you want to learn accounting, debit and credit would be the first concepts you would learn.

In business, many financial transactions take place in a financial period. As an accountant, it’s our job to look at the transactions, find out all the accounts, and then identify each account as either debit or credit.

Before we go in detail, we need to understand the double-entry system. The double entry systemDouble Entry SystemDouble Entry Accounting System is an accounting approach which states that each & every business transaction is recorded in at least 2 accounts, i.e., a Debit & a Credit. Furthermore, the number of transactions entered as the debits must be equivalent to that of the credits. read more means every transaction would have two accounts – one would be debit, and another would be credit. For example, if Company A withdraws cash of $10,000 from the bank, this transaction will involve two accounts under the double-entry system. One would be cash, and another would be a bank.

If you are new to accounting, you may have a look at this Basic Tutorial on AccountingBasic Tutorial On AccountingAccounting is the formal process through which a company attempts to present its financial information in a way that is both auditable and usable by the general public. read more.

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Debit vs. Credit Accounting Infographics

Let’s see the top differences between debitDebitDebit represents either an increase in a company’s expenses or a decline in its revenue. read more vs. credit accounting.

Key Differences

  • In most cases, when debit increases the account, the credit decreases the account and vice versa. One of the most prominent exceptions is when cash is being introduced to business as capital. Here, both accounts are increasing, but “cash” would be debited, and “capital” would be credited.Debit usually denotes the usage of one account. And credit usually indicates the source of another account.We debit the account when the asset/expenses account increases, and the liability/income account decreases. We credit the account when the asset/expenses account decreases, and the liability/income account increases.Debit and credit are the cornerstones of the double-entry system. Without anyone’s account, another can’t exist.The debit is the effect of crediting another account and vice-versa.

Comparative table

Conclusion

Debit and credit exist together, like twins in accounting. If you understand one, understanding another becomes much simpler.

The rules of accountingRules Of AccountingAccounting rules are guidelines to follow for registering daily transactions in the entity book through the double-entry system. Here, every transaction must have at least 2 accounts (same amount), with one being debited & the other being credited. read more are obvious. If you can just remember what increases and what decreases, you would be able to identify which account should be debited and which account should be credited.

All you need to do is to take an example and try out. Pick any transaction of a businessTransaction Of A BusinessA business transaction is the exchange of goods or services for cash with third parties (such as customers, vendors, etc.). The goods involved have monetary and tangible economic value, which may be recorded and presented in the company’s financial statements.read more and try to record a journal entry. You will easily be able to understand the meaning and application of debit and credit.

Debit vs. Credit in Accounting Video

This has been a guide to Debit vs. Credit Accounting. Here we discuss the top differences between Debit and Credit with infographics and comparative table. You may also have a look at these following articles to learn more about accounting.

  • Compare – Debit Note vs Credit NoteCompare - Debit Note Vs Credit NoteBoth the debit notes and the credit notes are issued in the situation involving the return or cancellation of goods and services by one party to another, where debit note is issued by the buyer of goods and services if it is returned back to the vendor whereas the credit note is issued by the seller of goods and services if it is returned back to him by the purchaser.read moreDebit Memo ExampleDebit Memo ExampleA debit memo is a document that is used to increase the billing of a service or goods, or to record a transaction between a customer and a seller. The major reason to raise this memo is the possibility of a price hike in the products being sold.read moreCompare – Tax Credits vs Tax DeductionsCompare - Tax Credits Vs Tax DeductionsTax credit refers to the amount reduced directly from the total tax liability of the person or corporation. In contrast, tax deductions can be deducted from the person or corporation’s total income, thereby reducing tax liability by decreasing taxable income (it does not directly reduce the tax liability amount).read moreLine of Credit CalculatorLine Of Credit CalculatorA line of credit refers to a flexible loan offered by the financial institutions whereby the borrower can flexibly access a certain sum and repay it at once or in installments. Line of Credit Calculator evaluates the LOC interest as [ ∑{(A * N)/n} + O ] * i; where A is the each billing period’s purchase amount, N is the remaining number of periods in a billing cycle, n is the number of days in the billing period, O is the opening balance, and i is the interest rate.read more