Already during medieval times, the bankers of that time undertook to write down the inflows and outflows of funds. When a customer left some money in his deposit, it was noted as "debet dare." This indicated to the banker that he owed money to that client, after he made the deposit, of course. Instead, when the client wanted to withdraw the money from him, the banker wrote it down as "debet habere" to record the outflow of funds. Today, the terms used for these actions are very similar and important to understand. Therefore, we will dedicate this article to explain what is debit and credit
Within accounting, the terms debit and credit They are some of the most basic concepts in this sector. If we want to dedicate ourselves to the world of finance or at least understand it well, these two elements must be made very clear to us. For this reason we are going to explain what debits and credits are, the differences between the two concepts and how they are recorded in the different types of accounts. So do not hesitate to continue reading if you still get confused with these two terms.
Table of Contents
What is the debit in accounting?
When we talk about the debit in accounting, we refer to the income that a company receives. These are reflected as a charge to the account. Therefore, the debit represents the decrease in finances and the increase in investments. In other words: It reflects the increase in both assets and expenses. At a visual level, it is usually represented in the left column of the ledger accounts.
Basically, the debit records all transactions that represent an income to the account. Regarding the annotation, it is reflected as a charge. It should be noted that debit and credit are two opposite concepts. However, they are directly related: Whenever the debit increases, the credit will decrease, and vice versa.
What is credit in accounting?
Now that we know what a debit is, let's explain what a credit is. In this case, all deliveries and withdrawals from an account are recorded. Contrary to the previous case, the decrease in investments and the increase in financing are reflected. In other words: Credit represents the increase in income and liabilities. It is generally represented in the right column of the ledger accounts.
As we have mentioned before, they are two opposite concepts, so the credit registers all the transactions that come out. As for the annotation, in this case it is reflected as a payment. Now that it is clearer what debits and credits are, we must bear in mind that the double-entry rule always applies: There is no creditor without a debtor, and no debtor without a creditor. In other words: Whenever one of the elements increases, the other decreases. An example would be the acquisition of a good, we increase our assets but we have to pay for it.
What is debit and credit: Types of accounts
Once we are clear about what debits and credits are, let's see how they are represented in the different types of accounts. exist three groups from the same:
- Asset Accounts: They reflect the rights and assets of a company, through which it can carry out its activities. These increase thanks to debit and decrease by credit.
- Liability accounts: These are made up of the obligations that the company in question has with a third party. The asset account is usually obtained through the liability account. These increase thanks to having and decrease by debit.
- Net Worth Accounts: They are those that represent own funds or financing.
Whatever the financial operation that a company wants to carry out, it will increase or decrease the assets of said company. In order to post this operation, an account is credited or debited, also always pointing out when it was done. Let's see what each concept is:
- Pay: When a credit transaction is recorded, an account is credited.
- Carry: When a debit transaction is recorded, an account is debited.
When we are clear about the type of account involved in the transaction, we can credit or debit. For this, it is essential that the following data be reflected:
- name and number of the ledger account
- Amount of the transaction
Balances and their types
We are talking about terms belonging to basic accounting, of which debits, credits and accounts are part. Now let's discuss the different types of balances there are. When we speak of balance, we refer to the difference between debit and credit. Depending on the result, there are three different types of balance:
- Debit balance: The account has a debit balance when its debit is greater than its credit. That is to say: Must > Have. For this reason, expense and asset accounts have this type of balance. This is because the debit reflects your transactions while the credit represents your decreases. To get the result, you have to subtract the credit from the debit. The calculation would be this: Must – Have.
- Credit balance: Contrary to the previous one, the credit balance occurs when the credit is greater than the debt. That is to say: Have > Must. Thus, income, net worth and liability accounts have this type of balance, since the initial amounts are recorded as credits while decreases are reflected in debits. The result is calculated by subtracting the debit from the credit. The formula would be this then: Credit – Must.
- Zero balance: It occurs in accounts in which credit and debit are the same. That is: Must = Have
It is true that both concepts can be somewhat confusing at first, but understanding them will help us considerably in the world of finance and accounting, especially when we want to set up our own company. I hope that with all this information it has become clear to you what debits and credits are and how they are reflected in the different types of accounts.