Debit and Credit

• Debits and credits are entries made in account ledgers to record changes in value from business transactons.
• In double entry bookkeeping, debits and credits are abbreviated as Dr and Cr, respectively .
• Generally,the source account for the transaction is credited (that is, an entry is made on the right side of the account's ledger) and the destination account is debited (that is, an entry is made on the left side).
• Total debits must equal to total credits for each transaction.
• The difference between the total debits and total credits in a single account is the account's balance.
• If debits exceed credits, the account has a debit balance; if credits exceed debits, the account has a credit balance.

What is an account ?

• To keep a company's financial data organized, accountants developed a system that sorts transactions into records called accounts.
• This list is referred to as the company's chart of accounts.
• The accounts are organized in chart of accounts as follows :
  • Assets
  • Liabilities
  • Owner's(Stockholder's)Equity
  • Revenues or incomes
  • Expenses
  • Gains
  • Losses

Effecting of debits and credits to chart of accounts :

Assets :

• Assets are normally debits.
• They constitute company’s movable and immovable property and goods.
• They include items of Cash balance and Bank balance also in addition to vehicles, buildings, furniture and bills receivable and interest receivable etc.
• When some asset is sold, it is posted on the credit side of the account.

Liabilities :

• Liabilities are credits.
• They indicate the amount payble by the company to creditors such as bills payable, loans, overdraft, etc.
• These accounts normally have credit balances.

Equity / Capital:

• Capital refers to the paid-up capital of the company along with equity shares.
• This constitutes the company’s fund invested in business. It is repayable to the owner and the shareholders of the company.
• So it is a liability. It will be a credit balance always.

Income / Revenue :

• This group of accounts shows the income received by the company by way of sale of goods or services or by any other form of interest received, profit on the sale of assets, commission etc.

Expenses :

• Expenses: Expense includes all expenditure items incurred such as rent, cartage, electricity, postage, travel, stationery, bank charges, etc.

Example explaining how credit and debit effecting to accounts :