Difference Between Debit and Credit

The main difference between debit and credit lies in their accounting context. Debit refers to an entry on the left side of an account, representing an increase in assets or a decrease in liabilities. On the other hand, credit involves an entry on the right side, denoting an increase in liabilities or a decrease in assets. Let's explore the differences. 

Accounting can be daunting, with its jargon, complex equations, and seemingly endless rules and regulations. But fear not because understanding accounting basics is easier than you might think, starting with two fundamental concepts: Debit (Dr.) and Credit (Cr.). 

Whether managing your finances or running a business, knowing the difference between debit and credit is essential for keeping track of your financial transactions and making informed financial decisions. In this blog, we’ll break down what debit and credit mean in accounting and how they work together to keep your financial records accurate and current.

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Table of Content

• Comparative Table: Debit and Credit
• What is Debit?
• What is Credit?
• Debit and Credit Entries as per Classical Approach
• Debit and Credit Entries as per Modern Approach
• Key Differences Between Debit and Credit

Let’s dive in and understand these basic yet essential accounting concepts, i.e., dr. and cr.

Comparative Table: Debit and Credit

What is Debit (Dr.)?

Essentially, a debit is an account entry that shows the increase of assets or the decrease of liabilities. In other words, a debit entry records an inflow of funds into an account or a debt reduction. For example, if a company purchases a new asset using cash, the cash account is debited, and the asset account is credited.

In financial statements, debit entries are typically shown on the left-hand side of an account. Debits are used to record expenses, losses, and assets.

Example of Debit (Dr.) Entries:

Purchase of Equipment: Machinery purchased for ₹50,000.
Reason: Machinery is an asset, and debiting it increases its value.

Salary Payment: Salaries paid to employees ₹20,000.
Reason: Salary is an expense, and debiting increases expense accounts.

Rent Paid: Office rent ₹15,000 paid in cash.
Reason: Rent is an expense and needs to be debited.

Accounts Receivable: Credit sales to a customer ₹30,000.
Reason: Debiting accounts receivable increases the amount owed to you.

Inventory Purchase: Goods purchased for ₹40,000.
Reason: Inventory is an asset, and debiting increases its value.

What is Credit (Cr.)?

A credit is an accounting entry representing a decrease in assets or an increase in liabilities. In other words, a credit entry records an outflow of funds from an account or an increase in debt. For example, if a company sells goods on credit, the accounts receivable account is credited, and the revenue account is debited.

In financial statements, credit entries are typically shown on the right-hand side of an account. Credits are used to record income, gains, and liabilities.

Examples of Credit (Cr.):

Loan Taken: Borrowed ₹1,00,000 from a bank.
Reason: Loan is a liability, and crediting increases liabilities.

Cash Sales: Sold goods for ₹25,000 in cash.
Reason: Crediting cash reflects the increase in assets.

Rent Received: Rental income of ₹12,000 received.
Reason: Income accounts are credited to record the earnings.

Accounts Payable: Purchased goods on credit worth ₹35,000.
Reason: Accounts payable is a liability, and crediting increases liabilities.

Capital Introduced: Owner invests ₹50,000 into the business.
Reason: Capital is credited as it represents an increase in owner’s equity.

Debit and Credit Entries as per Classical Approach

Transactions are recorded by debiting one account and crediting another account according to these three “golden rules of accounting”: Here are the rules of Dr. and Cr.

Real Account: Debit what comes in and credit what goes out

Personal Account: Debit who receives and Credit who gives.

Nominal Account: Debit all expenses & losses and Credit all incomes & gains

Debit and Credit Entries as per Modern Approach

Note: Accounts with average debit balances are in bold. 

Key Differences Between Debit and Credit

• They are accounting entries that record financial transactions. A debit is an entry representing an increase in assets or a decrease in liabilities. At the same time, a credit is an entry representing a decrease in assets or an increase in liabilities.
• These entries create financial statements such as the balance sheet and income statement. Dr. entries create the left-hand side of the balance sheet, while Cr. entries create the right-hand side.
• Accountants use these entries in all accounts, including cash, accounts receivable, accounts payable, and inventory accounts.
• In double-entry bookkeeping, debits and credits record all transactions accurately and consistently.
• Reversing entries reverse previously recorded entries in the next accounting period. A reversing entry for a debit entry would be a credit entry, and a reversing entry for a credit entry would be a debit entry.

Conclusion

Debits and credits are two accounting entries used to record different types of financial transactions. Debits record increases or decreases in liabilities, while credits record decreases in assets or increases in liabilities. Understanding the difference between debits and credits is essential for accurate financial reporting and analysis.