Credit and debit basics in accounting are important aspects of double entry bookkeeping system. For understanding double entry bookkeeping system, one should have a fair idea about the credit and debit basics simply because of the reason that debits and credits are the fundamental constituents of double entry bookkeeping system.
For understanding the credit and debit basics in accounting, one should first know about journal entries in Accountancy.
Journal Entries in Accountancy
A journal is a book where commercial transactions are recorded in a chronological manner, in other words, according to their happening
- A journal entry is basically the recording of a commercial transaction to the journal
- A ledger is a book where accounting transactions or commercial transactions are recorded through accounts
- An account functions as a unit for entering and providing a summary of the commercial transactions
- Every commercial transaction is entered with the help of journal entries, which demonstrate names of accounts, amounts of transaction and whether the accounts are entered in the credit side or debit side of the ledger
Double Entry Bookkeeping System
- For entering transactions, double entry accounting or double entry bookkeeping system is applied in modern accounting methods
- Double entry bookkeeping system means that every time a commercial transaction is entered by applying two sides, credit and debit
- Credit implies the right hand side of the ledger account or journal entry and debit denotes the left hand side of the ledger account or journal entry
- The aggregate of the amounts on the debit side has to be equivalent to the aggregate of the amounts on the credit side
- A journal entry is termed as balanced if the aggregate of the amounts on the credit side is equivalent to the aggregate of the amounts on the debit side
T-Account
The ledger account is designed in the form of a T and it is also known as a T account. For examining the account, the T account is quite handy as it demonstrates both credit and debit sides of the account.
Credits and Debits of Account
The following table provides an idea about the increases and decreases in various accounts and debiting or crediting them accordingly:
| Debit | Credit
|
| Increase in expense accounts | Decrease in expense accounts
|
| Increase in asset accounts | Decrease in asset accounts
|
| Decrease in equity accounts | Increase in equity accounts
|
| Decrease in revenue accounts | Increase in revenue accounts
|
| Decrease in liability accounts | Increase in liability accounts
|
Normal Account Balances
- The expense accounts carry normal account balance on the debit side
- The asset accounts carry normal account balance on the debit side
- The liability accounts carry normal account balance on the credit side
- The revenue accounts carry normal account balance on the credit side
- The equity accounts carry normal account balance on the credit side
- The accounts carry normal account balance on that side where the additions in those accounts are entered
- Financial statements represent the accounts on that side, where they carry normal account balance