Debit Meaning and Credit Meaning
Most of the readers get confused when an accountant debit and credit transactions. Readers who don’t have accounting background ( even with little accounting background) generally think that a debit meaning an increase in the account and a credit meaning a decrease in the account. This is totally wrong thinking. Hence, A debit can show a decrease in the account and a credit can show an increase in the account. It depends on the type/category of account we are dealing with. Generally, there are seven types/categories of accounts.
Now which account type will show an increase/decrease when a debit entry is passed to it and which account type will show an increase/decrease when a credit entry is passed to it. Accounting equation explains this logic.
Assets = Liabilities + Capital
Accounting equation, shown above, can be further extended to show all seven types of accounts as follows.
Assets + Expenses + Losses = Liabilities + Revenues + Profits + Capital
Those types of accounts which are written to the left-side of the accounting equation show an increase when a debit entry is passed to it and those types of accounts which appear on the right-side of the accounting equation show a decrease when a debit entry is passed to it. Similarly, account types which appear to the left-side of the accounting equation show a decrease when a credit entry is passed to it and those account types which appear to the right-side of the accounting equation shows an increase when a credit entry is passed to it. Here we have an accounting equation example for further clarification.
Debit and Credit Chart
Still confused? Following image summarizes this logic and better explains the concept.
- “Assets” includes cash, investments, accounts receivable, inventory, supplies, land, buildings, equipment, vehicles, patents and copyrights.
- “Expenses” includes repair charges, payments, pre-payments, rent, electricity bill, interest paid, salaries expense etc.
- “Losses” includes loss on sale of property, impairment loss, loss on sale of investment etc.
- “Liabilities” includes accounts payable, notes payable, unearned revenue etc.
- “Revenues” includes the sale of goods/services.
- “Profits” includes profit on the sale of investment, profit on the sale of goods/services, interest received etc.
- “Capital” includes owner’s equity, shares of other companies etc.
Received a payment of $200 from a customer.
|Cash / Bank Account||$200|
⇒ Increase Cash / Bank Account (Debit)
⇒ Increase Revenue (Credit)
Repaid bank loan debt of $300
|Cash / Bank Account||$300|
⇒ Decrease bank loan liability (Debit)
⇒ Decrease Cash / Bank Account (Credit)