When is a Debit and Credit used?
Debit and Credit are terms used in double entry bookkeeping. They refer to entries made in accounts to reflect the transactions of a business. The terms are often abbreviated to Dr (Debit) and CR (Credit).
Do not try to read anything more into the terms other than debit means on the left hand side and credit means on the right hand side of the accounting equation.
What is a Debit?
- Debit entries show something which comes into the business
- Debits go on the left, and they either increase or decrease accounts depending on the type of account. For example assets are on the left side of the accounting equation so a debit will increase an asset account. In contrast liabilities are on the right side of the equation so a debit will decrease a liability account. For easy reference our Debit and Credit Chart shows the effect of debits and credits on particular types of account.
- For every Debit there must be a Credit
What is a Credit?
- Credit entries show something which went out of the business
- Credits go on the right, and they either increase or decrease accounts depending on the type of account. For example a liability is on the right side of the equation so a credit will increase a liability account. In contrast an asset is on the left side of the equation so a credit will decrease an asset account. For easy reference our Debit and Credit Chart shows the effect of debits and credits on particular types of account.
- For every Credit there must be a Debit
Debit and Credit on Bank Statement
Do not confuse the everyday use of the terms debited and credited on a bank statement with those defined above. A bank statement is a document supplied by the bank and reflects the accounting records of the bank and not those of the business.
When a business receives cash and deposits it with the bank it will debit cash in its accounting records (cash is an asset on the left side of the accounting equation). From the banks point of view it owes the cash to the business and therefore has a liability. To show this liability the bank will credit the account of the business and this in turn will show as a credit on the bank statement.
Likewise when a business pays cash from its bank account it will credit cash in its accounting records (the reduction of an asset). From the banks point of view it reduces the liability owed to the business and to reflect this, the bank will debit the account of the business and this in turn will show as a debit on the bank statement.
In summary the cash transactions the bank shows on the bank statement will be equal and opposite to those shown in the accounting records of the business.
DR or CR Account Balance
At the end of an accounting period the net difference between the total debits and the total credits on an account form the balance on the account.
Examples of accounting transactions and their effect on the accounting equation can been seen in our double entry bookkeeping example journals.