An inventor of accounting is Luca Pacioli, known as a priest from the Order of Francis. Accounting began to be known from his book entitled Summa de Arithmetica Geometria, Proportioni et Proportionalita in 1494 . There are two accounting related chapters discussed in the book, namely de Computis et Scripturi s. In this chapter, a discussion related to double entry and the introduction of debits and credits has been presented .
In addition, the book also states that each record must be in pairs. So the terms debit and credit are used. The use of accounting debits and credits must indeed be understood so that in doing bookkeeping there is no error. Accounting debits and credits are very important because every transaction affects both. So that debits and credits cannot be separated from each other. If the debit increases, the credit will decrease and if the credit increases, the debit will decrease.
Definition of Debit & Credit
In general, debit is a reduction in deposits in a bank account or record keeping that can increase the value of assets or reduce the amount of liability. While credit is the ability to make purchases or loans with an agreement to make payments within a certain period. Debit and credit are terms that are often used in the world of financial accounting. Debit is defined as the addition of money in a savings or account.
It also can be interpreted as an increase in transactions. While credit is defined as spending money when making a transaction. But debit and credit can not only be interpreted as an increase or decrease in money in savings. That is because for the benefit of the company’s financial statements , debit and credit are not that simple. There are several benefits of credit, including credit will increase the efficiency of capital. In addition, credit can also increase the usefulness of an item or product, be useful as a means of economic stability, and become a medium to increase national income.
Determine Debit / Credit
To determine accounting debits and credits, we encourage you to understand the following account classifications:
- Assets, namely company assets
- Liabilities, namely corporate debt
- Owner ‘Equity, that is, the company’s capital borrower
- Income, which is the company’s revenue
- Expenses, which is company spending
For account categories 1, 2 and 3 are in the balance sheet financial statement accounts . Whereas account categories 4 and 5 are in the income statement financial statement account . In writing the company’s financial debit and credit reports, the opponent’s account terms are known. An opponent’s account is a transaction that can affect at least 2 accounts. For example, in transactions for the purchase of company equipment on account the debt affected by the transaction is machines as fixed assets and the opposite account is accounts payable as a form of purchase on credit.
The terms debit note and credit note are often used in writing corporate accounting. A debit note is a document that contains notices relating to receivables from customers which are increasing for certain reasons. In the debit note document can also contain the company’s debt to the vendor or supplier . While credit notes are notification documents containing the company’s debt to customers so that it can be used to reduce the company’s debt to vendors or suppliers .
Also read: Know Clearer What Accounting and Amortization Are!
Differences in Debit and Credit in Accounting
Every time an accounting transaction occurs, there are at least two accounts that are always related. That is, debit entries are recorded on one account and credit entries are recorded against another account. There is no limit to the number of accounts involved in a transaction, but the minimum is not less than two accounts. The total debit and credit for each transaction must always be the same. So that accounting transactions are always said with balance. If a transaction is not balanced, then the financial statements may not be made. As such, the use of debits and credits in the two-column transaction recording format is the most important of all controls for accounting accuracy. The following are the differences in debit and credit in accounting that need to be understood:
- Debit refers to the left side of the general ledger account, while credit is related to the right side of the ledger account. In a personal account, the recipient will be debited and the giver will be credited.
- In the balance sheet account, anything that enters will be debited. While anything that comes out will be credited.
- For the income statement, all expenses and losses will be debited. But all income and profits will be credited.
- Increased debits are caused by increases in cash, inventory, factories and machinery, land and buildings, expenses (such as salaries, insurance, taxes, dividends, etc.). While the increase in credit is caused by an increase in shareholder funds, membership fees, rental income, retained earnings, debt, and so forth.
Examples of Debit and Credit in General Transactions
Following are some examples of debit and credit positions found in common transactions that often occur in a business :
- Selling merchandise in cash to customers, the debit account is Cash, and the credit account is Revenue.
- Selling merchandise on credit to customers, accounts receivable debit accounts. While the credit account is Revenue.
- Purchase equipment in cash to the supplier, the debit account is Equipment and the credit account is Cash.
- Purchase equipment on credit to suppliers, the debit account is Equipment and the credit account is Trade Debt.
- Receive cash for the settlement of accounts receivable by the customer, the debit account is Cash, and the credit account is Accounts Receivable.
- Buy fixed assetson credit to suppliers, Fixed Assets debit accounts and Trade Debt credit accounts.
- Cash inventoryfor suppliers, Inventory debit accounts, and Cash credit accounts.
- Purchase inventoryon credit to suppliers, Inventory debit accounts and Trade Debt credit accounts.
- Pay employee salaries, Salary expensesdebit accounts and Cash credit accounts.
Also read: 8 Basic Principles of Professional Ethics in the Field of Accounting
The Importance of Making Debit and Credit Reports
In a company, a business must often experience or make transactions. Both transactions internally and externally. These transactions require the company to make transaction documents in the form of financial statements. The preparation of financial statements is to determine the rate of entry and exit of company funds to minimize the possibility of over budgeting in certain account categories in reporting. There are five elements in accounting transactions, including debt, assets, income, capital and costs or expenses.
Conducting debit transactions must be accompanied by credit transactions. A company that does not have accounting debit and credit reporting documents cannot control the flow of financial inflows. In addition, company financial data also cannot be traced if something happens to the company’s finances. Therefore, the existence of a debit and credit report is expected to help oversee the company’s finances from the possibility of corruption from employees. Because good debit and credit data are always accompanied by reliable receipts or receipts.
In the world of accounting, the terms debit and credit are often mentioned. By understanding debit and credit accounting, you can do bookkeeping correctly and without error posting transactions. In journal entry , the number of accounting debits and credits must be the same. If it is not balanced, then automatically you have made a mistake in posting nominal in the journal you are working on. Recognizing debits and credits is the basis for studying accounting and doing accounting for the company. In running a business or company, maybe it’s time you use online accounting software such as Journals . With the help of software accounting , financial reports on your business will be managed more accurately.