What's the difference between a credit and a debit?

by chanty
(roodepoort)

Chanty asks: "What is the difference between credit and debit?"


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Accounting is what we call double entry, meaning for a debit there is a credit. Think 'for an action there is a reaction'.

A debit is an entry on the left side of a journal, a credit is an entry on the right side of a journal.

Meaning if you increase cash, for example, which by the way is a debit entry, you must have a credit entry to offset the debit. In other words you used the cash for something.

A debit entry increases an asset or an expense, but decreases a liability, equity, or revenue account.

Conversely, a credit entry decreases an asset or expense, but increases a liability, equity, or revenue account.

There's an easy way to remember this. The Accounting Equation is Assets = Liabilities + Equity. Assets are on the left, so have a debit (left side entry in a journal) balance. Liabilities and Equity are on the right of the equals sign, so have a credit balance.

What about revenue and expense accounts? Well, Revenue - Expenses = Profit, and Profit increases Equity, right? So Revenue accounts would increase Equity, so have a credit balance, like Equity accounts, and Expense accounts would decrease Equity, so have a debit balance.

Kind of confusing, isn't it?

Look at a sample journal entry for a Sale.

Cash......1000
Sales...........1000

Cash received increases the Cash account, an asset, so is a debit entry, which is on the left side of an entry.

Sales is a Revenue account, which has a credit balance, so a Sale would increase the total value of your Sales account, so is a credit, and is recorded on the right side of an entry.

I hope this all makes sense to you Chanty.

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