Debit and credit - what are these terms?

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Today, there is an accounting department in every enterprise, whether it is a company, production, shop or educational institution. And a competent person needs to understand elementary financial concepts. Many have heard terms such as “accounts debit, credit”, but not everyone can explain what it is. Today, however, knowledge of such basic concepts is simply a necessity. Debit and credit - what is it? It is worth understanding these concepts in more detail.

General data

Debit and credit - what is it? These terms are quite abstract even for the field of accounting, but they play a crucial role at all its levels. These concepts can be used interchangeably, both are able to increase and decrease the amount of funds in the account, however, these methods operate on the basis of a clear set of accounting principles.

Accounting methods in accounting

Debit and credit - what is it from the perspective of accounting and auditing? These are just methods that are used inaccounting report. In fact, these are opposite concepts to each other. Debit can be translated from Latin as "he must", and credit - "I must". These phrases contain the whole essence of these concepts. It will not be a mistake to say that these terms are accounting opposites. If the money goes out, then the credit grows. If they come, then the debit is already growing. These concepts define the directions, possibilities and boundaries of various economic processes and financial transactions.

Accounting for income and expenses

The concepts under consideration are used in accounting accounts presented in the form of a table with two columns. The columns contain data that is taken from accounts such as debit and credit. What it is? We can say that accounting is the basis of the financial language necessary for analyzing the activities of any organization. For this, a posting system is used, which was created specifically to account for all transactions. However, there are liabilities and assets. Active accounts are the placement of funds of a bank or company. In this case, the debit is the receipt of funds, and the credit, respectively, is the expense. For passive accounts, which reflect the state of raising funds, debit accounts will act as an expense, and credit accounts will act as income. If income increases on the asset accounts, then we can talk about an increase in the ownership of this enterprise. If the debit on passive accounts grows, this means that the company's funds are decreasing.

Debit: how does it work?

Let's deal with this concept. In terminologyfinancial statements, money is debited and credited to non-business accounts. It makes no sense to say that a business is "credited" with the money it receives when it comes to accounting principles. Debit and credit - what is it, after all? Since the reporting is always balanced, certain accounts can be used simultaneously. Simply put, any transaction has both a credit and a debit. Accountants usually simply write off the funds that come into a company or firm. What does it mean? For example, if assets increase, then this increase goes to debit accounts. If computers or furniture are bought, then the active ones increase again. In other words, they debit.

Credit: how does it work?

General lending rules are coming straight out of business. At that moment, when the inventory, as it were, "leaves" the company, the funds begin to flow to purchase goods. This increases the debit (cash) account, and also increases the credit - that is, receivables. Equity, income and debt grow with loans. That is, these are the so-called "credit" accounts, which are written off and reduced.

Decrease versus increase

How do the concepts of expense and income work in practice? Since different accounts go up and down when comparing credits and debits, people tend to confuse the terms. In naked theory, everything happens quite simply. Money only changes its accounts, since both debits and credits only show how money is redistributed when they leave the company.or come into it. The income, if paid (and there are no other obligations), does not reduce its liability account, but increases the asset account when received. For example, if an investor buys shares, the business income increases the cash account (debit), but also increases the equity by the same amount, that is, the balance sheet will be restored. For this, the total turnover on debit and credit for a certain period is considered. Often you can also find such a term as "debit-credit-postings", but this concept does not carry any specific meaning. It is simply meant to indicate that the transaction is between credit and debit accounts.

Debit and credit cards

There is some confusion about these terms as they are often used in different circumstances. Lenders are those who collect money and if something is credited to the account, the credit will increase. However, this reflects only one aspect of this concept: credit is funds that have left the company and exist in the form of obligations of the borrower. A debit card, on the other hand, is used for immediate money transfers from a money account and shows an increase in debit (expenditure) accounts in a money account.