Debits vs. Credits

What are debits and credit?

Debit (dr) basically means any money coming into an accounting and credit (cr) is the outflow of that money from that account. This is known as the double entry method in accounting. Many companies these days have adopted this method for accounting purposes and under this method, the business’ transactions are categorized into separate accounts. Each account is debited and credit. For example:

1.     Let’s say the business has a Cash account. The cash coming in and going out of the business will be debited and credit accordingly.

2.     Now the business has a Fixtures and fitting account, which represents the gross value of Fixtures and fittings.

When a business starts conducting daily transactions, the amounts in these accounts change. Debit and credit helps us explain these changes. For example: if a business has earned $400 cash and the cash is flowing into the business. The cash deposited in the bank account will mean that the cash in your business is increased by $400. And the accountant would “debit” the cash account by $400.

The journal entry for the cash account would be as follows:

Debit Cash - $400

Similarly, if the business spends $200 worth of cash on some expenses from the business bank account, $200 would be ”credited”. This would be shown as:

Credit Cash - $200

Debit and credit together

Let’s assume that you have a friend who is selling laptops. You have a new business and you need new laptops for everyone. Your friend is offering you a discount and since you’re a new business, you agree to buy the discounted laptop. You buy 3 laptops for $800. Now using the journal entry system, here’s how the cash flowing out of your business would look like. The cash would be credited.

Credit - Cash $800

However, this isn’t the only account that would be affected. You may have an account titled “Computer Equipment” for Laptops. This account would be debited. This account is increasing by $800, value of the total three laptops.

Debit - Computer Equipment $800

So in a double entry system, all debits have a corresponding credit. It will be shown like this, where cash is credited and the laptop account is debited.

Debit - Computer Equipment           $800

Credit - Cash                                                  $800

Debiting and crediting liability and equity accounts

Now we move on to how liability accounts are affected, as previously we were looking at asset accounts. Not all accounts in a business are asset accounts. You also have to record what you owe (liability) and what your business is worth or the total value (equity).

So now let’s assume that you take a bank loan to finance a purchase of a truck for your business. This bank loan of $1500 would mean that your cash account is increasing by $1500. In addition to your cash account increasing, your “bank loan” account is also increasing. This shows how much loan you have taken and basically what you “owe”. The more loans you take, the higher this account is valued at. So here we credit the “bank loan” account.

Debit - Cash                $1,500

Credit - Bank Loan                $1,500

Now let’s look at the equity account. For example you invest $6000 into your company. This would mean your cash in the business increases by $6000 and so does your hold or stake in the business. This would be called your share of “equity”. This would be recorded as the following:

Debit - Cash                $6,000

Credit - Equity                       $6,000

Crediting an equity account means the equity is increasing. It doesn’t measure how much the business has but how much the people investing in your business (including you) have at stake in your business. So this is why the equity account increases.