Debits and Credits
From Wikipedia, the free encyclopedia
Debit and Credit are formal bookkeeping and accounting terms that have opposite meanings and come from Latin. Debit comes from debere, which means "to owe". The Latin debitum means "debt". Credit comes from the Latin word credere, which means "to believe".
It is more common to use the terms in the plural, Debits and Credits.
Debit is abbreviated as Dr., while credit is abbreviated as Cr.
"Debit" also refers to the left side of a general ledger account, while "Credit" refers to the right side. Due to the proliferation of bookkeeping and accounting computer software, it is now common for Debits to be mistakenly treated as positive values and Credits to be mistakenly treated as negative values. This allows for mathematical calculations. This has lead to confusion as people do not understand why a Sales amount is treated as an negative value (Credit) and an expense is treated as a positive value (Debit). If the value of the debits are greater than the value of the credits, then the balance on the account is a debit and should not be described as a positive value balance.
Debits or Credits are neither positive or a negative values. The balance on an account is either a debit or a credit not a positive or a negative value.
Asset and expense accounts increase in value when debited and decrease when credited. Whereas liability, equity, and revenue accounts decrease in value when debited and increase when credited.
This distinction is somewhat counterintuitive, until the nature of those accounts is more closely scrutinized. For example, revenue is coded as a credit. After recording a day's sales invoices, the company will have credited a certain amount in revenue, but the customers ledger will hold a debit balance being the amount of the unpaid invoices. To fully understand this see Double-entry bookkeeping system where Debits and Credits form the core of that system.
For instance, the journal entry for paying the telephone bill might look like this:
| Description | Debits | Credits |
|---|---|---|
| Phone expense | $200 | |
| Cash | $200 |
The telephone company would record the exact same transaction (from their side) like this:
| Description | Debits | Credits |
|---|---|---|
| Cash | $200 | |
| Revenue | $200 |
Confusion also arises where the term debit is also informally referred to as a "charge" as in a charge card or Debit Card and that Credit is a limit set or an amount granted by a company to its customers as in a credit limit. They are used in a different context in these two cases.
It is often assumed that a debit decreases a balance, and a credit increases it, because this is how the terms are used on bank statements and using a debit card decreases the balance in one's bank account. However, this is because bank statements are traditionally written from the bank's perspective, where the customer's account is a liability. By withdrawing money, the customer is decreasing the bank's liability. Since liability accounts normally have a credit balance, the withdrawal of cash from a banking account is reflected on the bank's balance sheet as a debit.
[edit] External links
Further reading:
- Double-entry bookkeeping system
- Debits and Credits Explanation with Examples.
