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Accounting is the practice of recording the financial transactions of a business. To do this, it relies on two fundamental records: credit and debit in accounting. Scale, a debit, is a journal entry with the ability to increase an asset or expense, while decreasing capital, liability, or income. In the case of double-entry accounting, these entries are recorded on the left side.

Debits represent half of each financial transaction, offset by a credit to a different account on the opposite side. These debit-credit pairs show money flowing in and out of accounts, tracing its path through the organization.

Debits are best understood as a financial accounting tool when used in context. Here is an overview of the role of debits in double-entry bookkeeping and its relationship to different accounts.

Debits vs credits in double-entry bookkeeping

Credits and debits function face to face in double-entry bookkeeping. Each debit requires an equal and offsetting credit to a different account. In accordance with double-entry accounting standards, accountants always record transactions in pairs: credit to one, debit to the other.

For example, if Company ABC takes out a loan of $250,000, it would record the transaction as follows:

  • Debit cash account $250,000
  • Credit the borrowings account with $250,000

Although this is a basic example, this operation shows the relevance of double-entry bookkeeping and the purpose of credits and debits. Any accountant can reconcile these two transactions, which not only validates them, but also brings transparency and traceability to cash flows.

How Charges Affect Different Accounts

The role of debits in accounting for different types of financial transactions comes down to an economic benefit: the flow of capital from a source to a destination. Here’s an overview of how it affects different accounts when applied as part of a cost-effective transaction:

  • Dividends. When a company issues a dividend, it reduces equity and increases liabilities. The debits represent a to augment to this account.
  • Expenses. The debit of an expense report involves a to augment balance, generally offset by a decrease in liabilities, income or equity.
  • Assets. A debit on asset accounts to augment the balance. For example, adding inventory will reduce cash and increase the number of units.
  • Passives. Debits to diminish the balance of liability accounts. The best example is a bank loan. The debit represents repayment of the loan, therefore a reduction in liability.
  • Equity. Debits to a capital account will be to diminish them, since they represent an increased stake in the property – therefore, a greater claim vs the company.
  • Income. One debit to revenue equals one to diminishsince it records the money going out of the business, used for expenses.

Again, economic benefit is the main driver of debits and its offsetting credits. The flow rates are always the destination of economic benefits: capital paid into an account. Accountants should always bear this in mind when recording transactions, as the offset credit should represent the source of the economic benefit. This is why accuracy is fundamental in double-entry bookkeeping.

Common Accounting Actions

There are many common accounting actions that businesses will record on a daily basis. Here is an overview of how they are debited (and credited) depending on the nature of the transaction and the accounts affected by the double-entry standard:

  • Cash selling : Debit cash, credit income
  • Sale on credit: Accounts receivable, credit income
  • Accounts Receivable: Debit money, credit accounts receivable
  • Accounts payable: Debit accounts payable, credit cash
  • Pay employees: Debit wages and payroll, credit cash

Credits always affect the account from which the capital originates; debits always affect the account to which they are transferred. There are always two accounts; however, many transactions may involve more.

What happens when debits outweigh credits?

The purpose of double-entry bookkeeping is to balance all credits and debits. At any point in a financial accounting period, debits must equal credits. If they don’t, there is a problem. When they outweigh the credits, it tends to mean that one of many things has happened.

  • Double debiting or incorrectly assigning a credit to a debit can cause an imbalance between accounts. Fortunately, accounting software includes protections to avoid this type of misattribution.
  • A clerical error can create an imbalance. A missed or misplaced decimal point, or an incorrectly entered number can disrupt flow. For example, entering $1,005 as $1,050 or $100,050 will result in an overcharge. Again, accounting software protects against this.
  • An erroneous attribution can also distort the balance sheet. For example, debiting assets instead of equity can create conflicting numbers between these accounts, resulting in excess debits.

When the the balance sheet leans in favor of the debtors, the accounts must carry out an audit. This situation, called a debit balance, must be resolved before the company closes its books. This is the purpose of a trial balance: to make sure that everything is in line before the end of the accounting period.

Fundamental part of accounting

Debits are neither good nor bad in the context of accounting; rather, they represent the chain of record keeping that enables transparency in accounting. Along with credits, they are a key element in illuminating a company’s cash flow and financial health. Each one credited to a company’s account requires an equal and offsetting series of credits elsewhere on the books, creating a trail for accountants and auditors to follow.

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Keep in mind that debits always increase assets and expenses, while decreasing liabilities, income, and equity. Recognize this in the context of a company’s balance sheet and income statement to better understand the financial health and operations of that organization.