The definition of debit and credit is a term used in accounting that refers to the recognition of transactions in financial statements. Debit is a term used to describe a transaction that adds to the amount of money in an account. For example, if a company receives money from a sales transaction, the company records the transaction as a debit to the sales account.
Meanwhile, credit is a term used to describe a transaction that reduces the amount of money in an account. For example, if a company spends money to buy raw materials, the company will record the transaction as a credit in the purchases account.
Debits and credits are used together to follow an accounting principle known as the duality principle, which means that every transaction must have an impact on at least two different accounts.
Definition of Debit and Credit
In accounting, debit and credit are terms that are inseparable and complement each other. The two always appear together in every transaction.
The most common understanding of debits and credits is that debits are additions, while credits are subtractions. However, in the world of accounting, a more precise understanding is: a debit is a transaction that increases the amount of money in an account, while a credit is a transaction that reduces the amount of money in an account. In more detail, here is the meaning of the terms credit and debit.
debit
To begin with, we will discuss a little about the origin of the word discharge. Debit comes from the Latin word debere which means accounting records where assets and costs have increased. Debits are usually placed on the left side and additions to assets can be in the form of additional money, tools, or even things that are not directly tangible such as rent or receivables.
The term debit is often used in the world of accounting and refers to the left side of an accounting journal. Debit is often used to describe an increase in assets or a decrease in liabilities.
In the accounting system, debits and credits are used together to record financial transactions and ensure that the total debits equal the total credits.
According to experts, debit can be interpreted as a record that reflects an increase in assets or a decrease in liabilities. Debit can also be interpreted as part of the accounting system used to record financial transactions and ensure that total debits equal total credits.
Credit
The term credit refers to the accounting records for debt and equity accounts that have increased. Credit is usually placed on the right side and comes from the Latin word credere.
Credit is an accounting record that reflects an increase in debt or equity. Credits are usually placed on the right side of accounting journals and are for the purpose of recording financial transactions and ensuring that the total debits equal the total credits.
According to experts, credit can be interpreted as a record that reflects an increase in debt or equity. Credit can also be interpreted as part of the accounting system used to record financial transactions and ensure that total debits equal total credits.
If an asset or expense is placed on credit, it means that the value of the account is reduced. Conversely, if a payable, accumulated, or equity account is placed in a debit position, it means that the value of those accounts is reduced. Profits and sales can also add up if placed in a credit position.
From the explanation above about the meaning of debit and credit, it can be concluded that debit and credit are two terms used in the world of accounting to record financial transactions.
Debits refer to increases in assets or decreases in liabilities, while credits refer to increases in debt or equity. Debits and credits are usually placed on opposite sides of an accounting journal and are used together to ensure that the total debits equal the total credits.
In short, debits are records for increasing assets or decreasing liabilities, while credits are recording for increases in debt or equity. These two terms are important in maintaining accuracy in accounting and ensuring that financial transactions are properly recorded.
Difference between Debit and Credit with Examples
Every time an accounting transaction occurs, at least two accounts are always affected. Debit entries will be recorded on one account and credit entries will be recorded against another account. There is no limit to the number of accounts involved in a transaction, but there are at least two accounts.
The total debits and credits for each transaction must always be the same, so that accounting transactions are always said to be balanced. If a transaction is not balanced, it is impossible to make financial statements.
The use of debits and credits in the two-column transaction recording format is the most important aspect of any control over accounting accuracy. Here’s an example:
- Debit refers to the left side of the ledger account while credit refers to the right side of the ledger account. In a personal account, the recipient will be debited while the giver will be credited.
- Whatever goes into the account, will be debited on the balance sheet, while whatever comes out will be credited.
- In the income statement, all expenses and losses are debited, but all income and gains are credited.
- The increase in debits was due to increases in cash, inventories, factories and machinery, land and buildings, as well as expenses such as salaries, insurance, taxes, dividends, and others.
- The increase in credit was due to an increase in shareholder funds, membership fees, rental income, retained earnings, debt, and others.
The difference between the terms debit and credit can also be seen from three aspects, namely the recording, the type of income statement record and the source of the result. Here’s a further explanation.
1. The record
Debits and credits have different ways of recording in accounting. The characteristics of debit and credit can be recognized immediately.
Debits are usually recorded on the left side. The debit portion includes things received or owned by the company. All records of the company’s income will be shown in the debit.
Credits are usually placed on the right side of a company’s financial records. The credit section usually includes money used by the company. In addition to receiving, the company must also spend money for business purposes.
2. Recording of profit and loss statements
In the income statement, debits and credits have different ways of recording. Debits are usually obtained from losses and expenses made by the company.
While credit is usually recorded from the income and profits earned by the company.
3. Source of results
Debt can increase when there is income from cash, machinery, inventory, buildings, company land, insurance, and others.
Meanwhile, the amount of credit can increase when there is income from debt, taxes, retained earnings, funds for shareholders, and others.
To make it clearer, consider some examples of transactions from the difference between debit and credit below:
- Selling merchandise for cash to customers, the debit account is Cash, and the credit account is Revenue.
- Selling merchandise on credit to customers, the debit account is Accounts Receivable. While the credit account is Income.
- Purchased equipment in cash from a supplier, the debit account is Equipment and the credit account is Cash.
- Purchased equipment on credit from a supplier, the debit account is Equipment and the credit account is Accounts Payable.
- Receiving cash for settlement of accounts receivable by customers, the debit account is Cash, and the credit account is Trade Receivable.
- Buying fixed assets on credit from suppliers, the debit account is Fixed Assets and the credit account is Trade Payables.
- Inventory purchases in cash from suppliers, the debit account is Inventory, and the credit account is Cash.
- Inventory purchases on credit from suppliers, the debit account is Inventory and the credit account is Accounts Payable.
- Paying employee salaries, the debit account is Salary expenses and the credit account is Cash.
From the explanation above, it can be concluded that the difference between the terms debit and credit is as follows:
- Debit is the recording of the reduction of the nominal money, while credit is the recording of the addition of the nominal money.
- Debit transactions can be interpreted as an activity of saving at a bank, while credit is an activity of issuing money at a bank or can be interpreted as an activity of borrowing money at a bank.
- Debit is a bookkeeping record of the reduction of deposit funds.
The Use of Debits and Credits in Accounting
In accounting, debits and credits are used to record financial transactions that occur within a company. The principle of using debits and credits can be explained as follows:
- For every transaction that occurs, there will be at least 2 affected accounts. One account will be recorded with a debit entry, while the other account will be recorded with a credit entry.
- The total of debit and credit entries must always be equal and balanced, so that the resulting financial reports can be received correctly.
- The use of debits and credits can help control the accuracy of accounting, because each transaction must meet the principle of balance.
Of every debit and credit use, each has a transaction term or name. Here’s the explanation:
1. Assets
Assets are assets that are divided into two, namely current and non-current assets. Current assets are assets that are easily liquidated, such as cash and cash equivalents, accounts receivable, prepaid rent, and others. While non-current assets are machinery, vehicles and office equipment. When this asset account increases, the position will be debited.
2. Expenses or Expenses
Expenses are expenditures or costs incurred by the company in running its business. Expenses can be divided into several categories, including operating costs, non-operating costs, and tax costs.
In accounting records, expenses are recorded with debit entries. For example, if a company spends money to pay employee salaries, the Salary Expenses account will be recorded with a debit entry, and the Cash account will be recorded with a credit entry.
The position of debits and credits in expenses depends on the basic principles of accounting which are called the first basic accounting principles, namely the basic principles of realization. This principle states that revenue must be recorded when a sales transaction occurs, while expenses must be recorded when a purchase transaction occurs.
Thus, if a company spends money to pay employee salaries, the transaction is an expense that must be recorded at the time the salary payment transaction occurs.
3. Liabilities and Equity
Liability and equity are two concepts used in accounting and form part of the balance sheet. Liabilities are obligations that must be borne by the company, while equity is the right of the owner of the company over the company’s assets.
The terms “credits” and “debits” are used in accounting to denote flows in or out of assets, liabilities or equity. When something is credited (added) to an account, the account balance will increase. Conversely, when something is debited (deducted) from an account, the account balance will decrease.
For example, if a company receives a payment from a customer, then the amount of the payment will be credited to the “cash” account as company assets which will add to the account balance. Conversely, if the company pays salaries to its employees, then the amount of the payment will be debited from the “cash” account as a company asset, which will reduce the balance in that account.
4. Accumulation
Accumulation is the process of adding or gathering something that adds up over time. In debit and credit, accumulation refers to adding to the amount of money recorded in an account.
Debit is a record that shows the amount of money issued from an account, while credit is a record that shows the amount of money that goes into an account. Accumulation in debits and credits is useful for monitoring the development of the amount of money in the account and helps in making the right financial decisions.
For example, if someone has a bank account that records a balance of IDR 10,000,000. When someone spends IDR 500,000, the note in the account will become a debit of IDR 500,000. Conversely, if that person receives Rp. 1,000,000 in cash, then the notes in the account will become a credit of Rp. 1,000,000.
Thus, accumulation in debits and credits is a process that helps one to better monitor and manage finances.
Companies often experience various kinds of transactions, both related to internal and external. In order to manage finances properly, companies must make financial reports that record all transactions that occur. One way is to record debits and credits.
Debit and credit are two important concepts in accounting. Debit is a record that shows the amount of money issued from an account, while credit is a record that shows the amount of money that goes into an account.
Companies that do not have proper debit and credit records will not be able to manage financial flows properly and will not be able to know the company’s financial condition with certainty.
To manage finances properly, companies must record transactions that occur accurately, including transactions related to debt, assets, income, capital, and costs or expenses. By having accurate financial reports, companies can minimize the risk of over-budgeting in certain account categories and can know the company’s financial condition clearly.
By recording the debit and credit processes correctly, it is hoped that it can help companies monitor finances to avoid possible acts of corruption or fraud committed by employees. In addition, good debit and credit records are always accompanied by reliable evidence such as official receipts or notes. Thus, the company can ensure that the company’s finances are managed properly and there are no irregularities.