The term ‘Debit’ can be defined as the decrease in owner’s equity and the term ‘Credit’ can be defined as the increase in owner’s equity. In this context, these two terms are used in every financial transaction of the company to show their profitability status and position in terms of total revenue generation.
A businessman creates a business and its revenues are shown in terms of Debit and Credit. Whatever the business earns, it has to be paid to all the investors and the other members that are associated with it. The income statistics are shown in the form of credit and the paid amounts are shown as debit.
Debit and Credit:
The word credit refers to ‘Creditor’ and can be written as ‘Cr.’Creditors are the persons or parties whose payments are made by the company. If the capital is invested by the owner of the company, then the income is earned by the business itself. This value will be shown in the credit section of the financial transactions.
Considering the expenses, the capital invested by the proprietors of the business is liable to bear any further expenses. It will definitely decrease the value of their equity and debited in the books of accounts.
The word debit refers to ‘Debtors’ and can be written as ‘Dr.’Debtors are the persons or parties whose expenses are shown in the debit section of all financial transactions.
Different business organizations acquire or borrow money from proprietors. It is also termed as the expenditure of the business as the company has to pay back the amount or assets after a certain interval of time. So this value will go on to debit section as per the rules.
As of now, proprietors can claim their amount against the company. If the debits decrease in proprietor’s equity, then it represents an increase in assets (returns). In the same sense, a decrease in assets means it will increase proprietor’s claim. So this will be credited.
In the same way, when a company earns profit, this increase in capital will increase the proprietors’ equity and it gets credited. If the company earns some capital return, then this decrease in capital will decrease the proprietors’ equity and it gets debited.
Increase in liabilities of the business firm is the increase in the funds arranged by the company, so the proprietor will claim an increase in these funds. Thus, this value will also be credited. If the company has to pay liabilities by its own, then the amount of the proprietors all decrease and it will be debited.
The value of ‘Debit and Credit’ does not mean to be good or bad. It is just the value that either highlights the interest of the firm or against their interest.
The above-discussed rules are the modern approaches in accounting. It can be summarized as-
“Increase in value of assets and expenses (losses) and decrease in liability”,“Decrease in value of capital and revenue (profit) will decrease the proprietors’ claim against business”- it will be debited. Similarly, “Decrease in value of assets and expenses (losses) and increases in liability”, “Increase in value of capital and revenue (profit) will increase the proprietors’ share in business”- it will be credited.
Conventional approach towards ‘Debit’ and ‘Credit’:
Apart from accounting concepts and the assumptions, to make accounting meaningful, uniform and comparable, certain accounting conventions are required to follow. Some of these conventions are discussed below:
- Left-hand side of every financial account is represented as ‘Debit’ and right-hand side is represented as ‘Credit’
- For Journal and Trial Balance, the column is divided into two sections. Now, the same rule will be applied as left-hand side for ‘Debit’ and right-hand side for ‘Credit’
- While passing all the Journal entries, we will use the short form of Debit or Debtor as ‘Dr’. For Credit or Creditor, this will be written as ‘Cr’
- All payments will be in the Credit section and all receipts will be in Debit section
- Income and Profit are credited while expenses and losses are debited
- Increase in the liability is credited and increase in assets is debited
- In the Balance Sheet, the Liabilities section shows Credit and Assets section shows Debit