Business transactions are the activities which will bring the monetary impact of a company’s financial statements. When the accountants from an accounting firm in Johor Bahru are managing the accounting-related tasks for such transactions, they will record the sums in two different accounts. For each account, the left will be the debit column while the credit column will be on the right.
A debit will increase an expense or an asset account, or decrease a liability or an equity account. On the contrary, a credit will increase a liability or an equity account, or decrease an expense or an asset account.
How to Use Debits and Credits in Accounting?
When a company creates an accounting transaction, the transaction is going to affect at least two accounts and this is mainly due to the double entry accounting. It needs to record a debit entry in one account and record a credit entry in another account. A transaction must involve at least two accounts, and there is no restriction on the maximum number of accounts involved in a transaction. No matter what kind of transaction one has made, the sum of debit and credit entries must be equal to each other. This is to make sure that the accounting transactions can always be “in balance”. If a transaction is not balanced, the company will not be able to generate financial statements. Hence, the format of recording transactions in the debit and credit columns is the fundamental control over the accuracy of accounting.
Many people may feel confused about the inherent definitions of debits and credits. As an instance, when you debit a cash account, it indicates that there is an increase in the amount of cash you have on hand. Nevertheless, when you debit the accounts payable account, it implies that there is a decrease in your accounts payable, which is a type of liability. Such a situation occurs as the debit and credit entries will affect different types of accounts differently, which means that:
– For asset accounts, debit entries increase the balance while credit entries decrease the balance
– For liability accounts, debit entries decrease the balance while credit entries increase the balance
– For equity accounts, debit entries decrease the balance while credit entries increase the balance
The reason behind the statements above is because of the accounting equation below, which founds the whole structure of accounting transactions:
Assets = Liabilities + Equity
According to this equation, you will only obtain an asset if you spend your liabilities or equity to pay for them. Thus, usually, when you record a transaction by using debits and credits, it indicates that you have increased an asset (Also see Guide to Non-current Asset) while increasing your liabilities or equity. At the same time, according to this concept, if there is a decrease in the asset, your liabilities or equity will decrease too. However, some situations may be excluded from this rule; for example, you may increase an asset account and decrease the other asset account.
If you would like to focus more on the accounts that you will see on your income statement, have a look at these:
– For gain accounts, debit entries decrease the balance while credit entries increase the balance
– For loss accounts, debit entries increase the balance while credit entries decrease the balance
– For revenue accounts, debit entries decrease the balance while credit entries increase the balance
– For expense accounts, debit entries increase the balance while credit entries decrease the balance
In accounting transactions, the abbreviation for debit is Dr. while Cr. stands for credit. In the single entry accounting system, debits and credits will not appear. Usually, it will only involve an entry in a cash journal or a cheque book (Also see Steps of Bank Reconciliation), which indicates that the business has received or spend cash.