Difference Between Debit and Credit

Difference Between Debit and Credit

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Chanchal
Chanchal Aggarwal
Senior Executive Content
Updated on Jan 4, 2024 18:04 IST

The main difference between debit and credit lies in their accounting context. Debit refers to an entry on the left side of an account, representing an increase in assets or a decrease in liabilities. Credit, on the other hand, involves an entry on the right side, denoting an increase in liabilities or a decrease in assets.

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Accounting can be daunting, with its jargon, complex equations, and seemingly endless rules and regulations. But fear not because understanding accounting basics is easier than you might think, starting with two fundamental concepts: Debit (Dr.) and Credit (Cr.). 

Whether managing your finances or running a business, knowing the difference between debit and credit is essential for keeping track of your financial transactions and making informed financial decisions. In this blog, we’ll break down what debit and credit mean in accounting and how they work together to keep your financial records accurate and current.

Explore: Online Accounting Courses

Table of Content

Let’s dive in and understand these basic yet essential accounting concepts, i.e., dr. and cr.!

Comparative Table: Debit and Credit

Parameters Debit Credit
Definition A debit is an entry representing an increase in assets or a decrease in liabilities. A credit is an entry representing a decrease in assets or an increase in liabilities.
Purpose Debit is used to record expenses, assets and losses.  Credit records incomes, gains and liabilities. 
Side of the Account Left side of the account Right side of the account
Effect on Account Balance Increases the account balance. Decreases the account balance
Examples Examples of debit are cash, asset purchase, and debt payments. Examples of credit include loans received, sales on credit and investments by owners. 

Also read: What is Journal in Accounting?

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What is Debit (Dr.)?

Essentially, a debit is an account entry that shows the increase of assets or the decrease of liabilities. In other words, a debit entry records an inflow of funds into an account or a debt reduction. For example, if a company purchases a new asset using cash, the cash account is debited, and the asset account is credited.

In financial statements, debit entries are typically shown on the left-hand side of an account. Debits are used to record expenses, losses, and assets.

What is Credit (Cr.)?

A credit is an accounting entry representing a decrease in assets or an increase in liabilities. In other words, a credit entry records an outflow of funds from an account or an increase in debt. For example, if a company sells goods on credit, the accounts receivable account is credited, and the revenue account is debited.

In financial statements, credit entries are typically shown on the right-hand side of an account. Credits are used to record income, gains, and liabilities.

Debit and Credit Entries as per Classical Approach

Transactions are recorded by debiting one account and crediting another account according to these three “golden rules of accounting”: Here are the rules of dr. and cr.

Must read: 3 Golden Rules of Accounting With Examples

Real Account: Debit what comes in and credit what goes out

Personal Account: Debit who receives and Credit who gives.

Nominal Account: Debit all expenses & losses and Credit all incomes & gains

 

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Debit and Credit Entries as per Modern Approach

Kind of Account Debit Credit
Asset Increase Decrease
Liability Decrease Increase
Income/ Revenue Decrease Increase
Expenses/ Cost/ Dividend Increase Decrease
Equity/ Capital Decrease Increase

Note: Accounts with normal debit balances are in bold

Key Differences Between Debit and Credit

  • They are accounting entries that record financial transactions. A debit is an entry representing an increase in assets or a decrease in liabilities. At the same time, a credit is an entry representing a decrease in assets or an increase in liabilities.
  • These entries create financial statements such as the balance sheet and income statement. Dr. entries are used to create the left-hand side of the balance sheet, while cr. entries are used to create the right-hand side of the balance sheet.
  • Accountants use these entries in all accounts, including cash, accounts receivable, accounts payable, and inventory accounts.
  • In double-entry bookkeeping, debits and credits record all transactions accurately and consistently.
  • Reversing entries reverse previously recorded entries in the next accounting period. A reversing entry for a debit entry would be a credit entry, and a reversing entry for a credit entry would be a debit entry.

Must read: Difference Between Balance Sheet And Income Statement

Conclusion

Debits and credits are two accounting entries used to record different types of financial transactions. Debits are used to record increases or decreases in liabilities, while credits are used to record decreases in assets or increases in liabilities. Understanding the difference between debits and credits is essential for accurate financial reporting and analysis.

FAQs

What is the meaning of debit and credit?

Debit and credit are fundamental terms in accounting that indicate the direction of increases or decreases in accounts. Debit represents the left side of an account and denotes an increase in assets and expenses or a decrease in liabilities and equity. Credit represents the right side of an account and denotes an increase in liabilities and equity or a decrease in assets and expenses.

How are debits and credits used in accounting?

Debits and credits are used in double-entry bookkeeping, where every transaction affects at least two accounts. Debits are used to record increases in assets and expenses or decreases in liabilities and equity, while credits are used to record increases in liabilities and equity or decreases in assets and expenses. The total debits must always equal the total credits in a transaction or financial statement.

How do debits and credits impact financial statements?

Debits and credits impact financial statements by ensuring the accuracy of the accounting equation (Assets = Liabilities + Equity) and maintaining the balance of the accounting records. The totals of debits and credits recorded in various accounts are used to prepare financial statements like the balance sheet, income statement, and statement of cash flows.

About the Author
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Chanchal Aggarwal
Senior Executive Content

Chanchal is a creative and enthusiastic content creator who enjoys writing research-driven, audience-specific and engaging content. Her curiosity for learning and exploring makes her a suitable writer for a variety ... Read Full Bio