Debit Credit Analysis

Debit and credit are the two most important concepts in accounting

Debits and credits are the two most important concepts in accounting. Debits are used to record all the monetary (which are measured in terms of money) transactions flowing into an account, and credits are used to record all the monetary transactions flowing out of an account.

Debit Credit Analysis

Debit and credit entries are made in the books of account, which may be a journal, ledger, and a trial balance. Whenever there is a transaction that occurs in a double-entry system, one account is debited, and on the other hand, another account is credited.

a) What is a debit?

"Debit" is an accounting term that is derived from the Latin word "debere," which means "to owe." The debit usually falls on the positive side of a balance sheet account.

b) What is credit?

"Credit" is the capacity to get, borrow money, or access goods and services with the understanding that you'll pay later. When you use a credit card to make a purchase, the total amount borrowed will appear on the negative side of an account.

There are mainly three kinds of credit: Installment creditRevolving credit, and Open credit.

Debit and Credit System

Debits and credits have a broad impact on the various types of accounts which are explained below:

  • Assets - It is increased by debit and decreased by credit.

  • Expenses - It is increased by debit and decreased by credit.

  • Liabilities - It is increased by credit and decreased by debit.

  • Equity - It is also increased by credit and decreased by debit.

  • Revenue - It is also increased by credit and decreased by debit.

A debit is an entry made in the accounting books which either increases an asset or expense account or decreases a liability or equity account. 

On the other hand, credit is an entry made in accounting that either increases a liability or equity account or decreases an asset or expense account.

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In each account, there must be a balance between debits and credits. This means that the end result should result in both sides equaling out. Ebit entries are usually made on the left-hand side, and credit entries are made on the right-hand side in the books of accounts.

Debits and credits are caused by the following accounting equation on which the entire structure of accounting transactions is built, which is given by:

Assets = Liability + Equity

Purpose of using debit (dr) and credit (cr) in accounts

There are few theories on the origins of the abbreviations used in bookkeeping for debit (DR) and credit (CR). To help make sense of these ideas, here is a brief introduction to the use of debits and credits.

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An increase in the value of resources is a debit to the account, whereas a decrease is a credit. On the other hand, an increase in liabilities or investor's value is a good representative of the record, denoted as "CR," and a decrease is a charge, denoted as "DR."

Using this two-fold section technique, accountants enter each debit and credit on two sides of an organization's monetary record.

The DR and CR contractions for debit and credit stand for "debit record" and "credit record," respectively.

At last, some accept that the DR documentation is another way to say "account holder" and CR is another way to say "loan boss."

Accountants perform debit-credit examinations consistently as part of their obligations. Debits and credits are most useful in a company's accounting or bookkeeping process in order to balance the books or entries made.

The basics of debits and credits in accounting must be known and is essential to learn, especially for small businesses to keep track of each and every transaction.

Golden Rules of accounting

There are three standards of debit and credit that guide the arrangement of records; they are known as the principles of accounting:

  • Real account - Debit what comes in, credit what goes out.

  • Nominal account - Debit all expenses and losses, credit all earnings and gains.

  • Personal account - Debit the receiver, credit the giver.

If there is anything that governs the world of accounting, it is the rules of debit and credit. Accounting would be a careless wreck without these principles.

To ensure the precision of the findings displayed by such books of records, the records must be kept up to date appropriately on these standards.

Rules Of Accounting

Each business deal that can be estimated in money-related terms tracks down a spot in the accounting or bookkeeping exchange of a firm. To record such exchanges, an arrangement of debit and credit has been concocted, which records such occasions through two unique records.

The entries made on the journal accounts are passed on the basis of the above-mentioned golden rules of accounting, and in order to apply these rules, one must first be familiar with the kind of account and then apply these rules.

These universally applicable and universally accepted guidelines govern each process. These guidelines outline the procedure of main functions in order to bring consistency in the presentation and overall structure of the concept.

Credit and debit accounts

For each transaction, make sure to keep track of the bookkeeping debits and credits. At the point when you record debits and credits, make at least two sections for each exchange. This is viewed as double-entry bookkeeping or accounting.

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While making transactions in your account books, you utilize various records that depend upon the type of transaction you make.

The net impact of these accounting entries is similar with respect to the amount that may be by debiting and crediting two unique records. The right and adequate accounting treatment can be displayed.

When an accounting transaction occurs, at least two records are constantly influenced, with a debit entry recorded in the DR section and a credit entry recorded in the CR section.

The total amount of the debits and credits for any transaction should continuously approach each other with the goal that an accounting transaction is constantly supposed to be in balance.
The accounting process includes the constant and ongoing update of transactions to provide an accurate and systematic picture of the company's financial statements. 

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Further, with the help of an accounting process, the results are interpreted and communicated to the individual users to access the financial information easily.

In the accounting process of debit and credit, the financial transactions are recorded in a systematic manner to keep a chronological record of the event's happenings.

Difference between Debit and Credit account

There are some major differences between debit and credit in accounting, and they are as follows:

 DebitCredit
MeaningDebit implies"owed to the proprietor" which shows "what we are going to receive".Credit implies "owed by the proprietor" which shows "what we will have to pay".
Entries madeDebit entries are made on the left-side in books of account.Credit entries are made on the right-side in the account
Impact on accountsIt increases the asset and expense account.It increases the liability, revenue and capital account.
Flow of moneIt records the money flowing inside an account.It records the money flowing out of an account.

Debit vs. Credit Transactions

We all know there's an undeniable difference between a debit card and a credit card. A debit card pulls reserves straight from your account, while a credit card allows you to borrow money from the card issuer, which requires a regular installment payment schedule.

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In short, debit and credit card transactions are handled differently behind the scenes. A debit card transaction is done by utilizing your PIN (Personal ID number), which is a web-based transaction finished continuously.

When you complete a debit transaction, you approve the buy with your PIN, and the computer automatically records your transaction and portrays it more accurately.

On the off chance that you utilize your debit card as credit, the assets are deducted after the merchant speaks with the card processor, which can require 2-3 days to reflect in your record.

While debit card transactions don't have reimbursement cutoff times, credit card transactions have reimbursement time periods that should be met to stay away from the cumulative interests, which may result in an exceptional sum.

Credit cards can offer some benefits over debit cards, though they can also have some downsides. Some credit cards might also provide additional warranties or insurance on purchased items that go beyond what the retailer is offering.

Difference between Debit and Credit Transactions

There are three fundamental contrasts between credit card and debit card transactions: cost, disputes, and essentials/overcharges.

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Cost - Merchants generally get charged per transaction, whether a debit or credit card is utilized. The amount charged depends on whether the card was handled through a credit card or debit card network.

Cards handled through a credit card network are charged the standard credit exchange or transaction expense. Contingent upon the processor, debit transactions or exchanges are dependent upon a debit card rate.

Disputes - A dispute will show up on a merchant's explanation as a debit back, whether it was a debit or credit card transaction.

Essentials and Surcharges -Merchants cannot add an extra charge to clients using debit cards.

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Uses of debit and credit transactions

During the covid period, people have started burning through cash in the midst of cutbacks and salary cuts. Individuals are currently going advanced to make digital payments. The increase in card exchanges or transactions at  Point of Sale System (POS)  terminals shows spending is gradually getting back to business as usual.

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The (Reserve Bank of India) information shows that people have begun cashing out more money through ATMs. Cash withdrawals and transactions by using debit cards are rising day by day.

According to the RBI, the usage of credit cards, including an NEFT MPS, rose to Rs. 24.19 lakh crore in June from Rs.20.18 lakh crore in May and Rs. 16.87 lakh crore in April.

This demonstrates that people are spending more, and their expenditures have risen through the transactions of debit and credit cards as per the RBI.

By using debit and credit cards, it is easy to buy, and it is also convenient to make purchases online. Debit cards allow you to spend the money through the withdrawal of funds that you have deposited at the bank. And credit cards allow you to borrow money from a card issuer.

Examples of Debits and Credits in accounting

Example #1

Assume Arihant Corporation sells a product to a customer for $2,000 in cash. This results in revenue of $2,000 and cash of $2,000. 

Arihant must record an increase in cash (asset) in the debit account and an increase in the revenue in the credit account. The entry should look like this:

 DebitCredit
Cash2,000-
Revenue-2,000

As shown in the above example, both the debit and credit side has equal amounts i,e $2,000, and is in the balanced state. 

Example #2

Arihant Corporation also buys a machine for $20,000 on credit. This is an addition of machinery (which is a fixed asset); therefore, it should be recorded in the debit account. On the credit side, this is an increase in the accounts payable (liability). The entry should look like this:

 DebitCredit
Machinery-Fixed Assets20,000-
Accounts Payable-20,000

The total sum of debits should be equivalent to the total sum of credits in a transaction. Any time the debit and credit transactions are unbalanced, then they can't be acknowledged by an accountant.

Debit Credit Analysis

The following are some of the steps to understand and remember the debits and credit accounting transactions in an easy way. 

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Step 1 - Learning the terms 

The first step is to familiarize yourself with the meaning of debit and credit and try to understand the major difference between them.

Step 2 - Use acronyms to remember the difference between debit and credit.

The next step is to remember the difference between them by using some acronyms. This is one of the simplest methods to remember the difference between both debit and credit.

For example, The below-mentioned accounts are increased with a debit: Dividends, Expenses, Assets, Losses, and you can remember these all with an acronym called "DEAL."

And on the other hand, Gains, Income, Revenues, Liabilities, and Stockholders' Equity accounts are increased with credit; you can use an acronym as "GIRLS."

Step 3 - Set up the balance sheet for every transaction.

The third step is to set up the balance sheet with all the debit and credit entries in the books of the account. It is an important step as all the entries need to be entered correctly.

Step 4 - Set up the ledgers for each account.

A general ledger is a standard method of recording the debit and credit entries for a particular accounting transaction, and all the debit and credit entries are entered in each ledger account.

Step 5 - Consider what is being exchanged during the transaction.

In this step, whenever there is any transaction, there will be an exchange of things, and that needs to be clearly understood.

Step 6 - Calculate the ending balance in each account.

The last step is to calculate the ending balance in each account and update the balance sheet. Always remember that the balance sheet should be appropriately maintained so that it always stays in balance. i. e, the debit and credit sides equate to the same amount. 

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There are many new accountants or bookkeepers nowadays that are entering into the profession without a clear understanding of how the type of accounts in accounting relate to each other and also how debit and credit affect these types of accounts.

Debit and credit represent the duality of financial transactions, which means the flow of an economic benefit from one side to another side. Both debit and credit are neither good nor bad.

Understanding debit and credit will have a great impact not only in the field of accounting but also on the growth of the business. This article has provided the basic knowledge regarding the analysis of debits and credits in accounting.

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Researched and authored by - "Spoorti Biradar"LinkedIn

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