If there is something that runs the world of accounting, it is the rules debit and credit. Without these rules, the world of accounting would be a haphazard mess. It is important that the accounts should be maintained properly on these rules, in order to ensure the accuracy of results displayed by such books of accounts.
Debit and Credit in Accounting
Every business transaction which can be measured in monetary terms finds a place in the accounting transactions of a firm. In order to record such transactions, a system of debit and credit has been devised, which records such events through two different accounts.
The net effect of these accounting entries is the same in terms of quantity. However, by debiting and crediting two different accounts, the correct and apt accounting treatment can be depicted. In a ledger account, usually the debit column is on the left and the credit column is on the right.
- A debit is an accounting entry that either increases an asset or expense account. Or decreases a liability or equity It is positioned on the left in an accounting entry.
- A credit is an accounting entry that increases either a liabilityor equity account. Or decreases an asset or expense account. It is positioned on the right in an accounting entry.
Whenever an accounting transaction happens, a minimum of two accounts is always impacted, with a debit entry being recorded against one account and a credit entry being recorded against another account. There is no upper limit to the number of accounts involved in a transaction but the minimum cannot be less than two accounts.
The totals of the debits and credits for any transaction must always equal each other so that an accounting transaction is always said to be in balance. Thus, the use of debits and credits in a two column transaction recording format is the most essential of all controls over accounting accuracy. This is how debit and credit find their use.
Rules for Debit and Credit
The following are the rules of debit and credit which guide the system of accounts, they are known as the Golden Rules of accountancy:
- First: Debit what comes in, Credit what goes out.
- Second: Debit all expenses and losses, Credit all incomes and gains.
- Third: Debit the receiver, Credit the giver.
A debit and credit entry have a broad impact on different accounts. For example, in
- Asset accounts, a debit increases the balance and a credit decreases the balance.
- Liability accounts, a debit decreases the balance and a credit increases the balance.
- Equity accounts, a debit decreases the balance and a credit increases the balance.
- Revenue accounts, a debit decreases the balance and a credit increases the balance