“Luca Pacioli” is the father of accounting, who discovered the concept of double entry system of book-keeping. As per this system, each and every business trasaction affects two sides of an account, i.e. debit, and credit. While debit indicates the destination, credit implies the source of monetary benefit.
In an accounting entry, the source account of a transaction is credited, whereas the destination account is debited. Debit represents the left hand side of the account, whereas credit represents the right hand side of the account. To a novice, these concepts might be very tough, but are really important to an accounting student, as it is the base of the entire system. So, take a read of the article presented to you, to have a better understanding on the difference between debit and credit.
Content: Debit Vs Credit
|Basis for Comparison||Debit||Credit|
|Meaning||Debit is an entry which is passed when there is an increase in asset or decrease in liabilities and owner's equity.||Credit is an entry which is passed when there is a decrease in assets or an increase in liabilities and owner's equity.|
|Which side in T-format ledger?||Left||Right|
|Real Account||What comes in||What goes out|
|Nominal Account||All expenses and losses||All incomes and gains|
Definition of Debit
The word debit is originated from the Latin word “debere” which means ‘to owe.’ It is an entry made on the left side of a ledger account shortly known as Dr. It is an accounting entry which is posted when there is an addition in assets, expenses, and losses or reduction in the incomes, gains, liabilities and owner’s equity. If the debit side of an account exceeds credit side, it is considered as debit balance. For Non-Accounting individuals, debit refers to the amount drawn or deducted from the particular bank account.
Definition of Credit
The word credit is originated from the Latin word “credere” which means ‘to entrust.’ It is an entry made on the right side of a ledger account shortly known as Cr. It is an accounting entry which is posted when there is an addition to incomes, gains, liabilities and owner’s equity or reduction in assets, expenses, and losses. If the credit side of an account exceeds the debit side, it is considered as a credit balance. For Non-Accounting Individuals, credit refers to the amount added to the particular bank account.
Key Differences Between Debit and Credit
The difference between debit and credit can be drawn clearly on the following grounds:
- Debit refers to the left side of the ledger account while credit relates to the right side of the ledger account.
- In personal accounts, the receiver is debited whereas the giver is credited.
- Whatever comes in, is debited in real account, while whatever goes out is credited in it.
- For nominal account – all the expenses and losses are debited, however, all incomes and gains are credited.
- The increase in debit is due to rise in cash, inventory, plant and machinery, land and building, expenses like salary, insurance, tax, dividend, etc. The increase in credit is due to rise in shareholders fund, membership fees, rental income, retained earnings, Account payable, etc.
Video: Rules of Debit and Credit
Debit and Credit both refer to the two hands of the same body. In accounting, it is of utmost importance as every single transaction affects both of them that they cannot be bifurcated from each other. If debit increases, credit decreases and if credit increases, debit decreases. The total of the debit side must be tallied with the total of the credit side.