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Debit / Credit - bilal azhar - 04-05-2005
how would u define debit and credit?
i have been studying accounting for the last two to three years and has studied almost all famous books of accounting like shukla and gupta,frankwood,pbp,pac papers etc but has not find a definition of debit and credit.debit credit rules are given in every book but how would u describe to a layman that what is debit and credit.
one of my accounting teacher,not a chartered accountant gave the following definiton of debit and credit
"when we divide a page into two parts,the left side is called debit and the right side is called credit."
i think that above definiton is not correct.would some body explain to us the debit/credit definition.
bilal
- Desert Sleet - 04-05-2005
<blockquote id="quote"><font size="1" face="Verdana, Tahoma, Arial" id="quote">quote<hr height="1" noshade id="quote"><i>Originally posted by bilal azhar</i>
<br />how would u define debit and credit?
i have been studying accounting for the last two to three years and has studied almost all famous books of accounting like shukla and gupta,frankwood,pbp,pac papers etc but has not find a definition of debit and credit.debit credit rules are given in every book but how would u describe to a layman that what is debit and credit.
one of my accounting teacher,not a chartered accountant gave the following definiton of debit and credit
"when we divide a page into two parts,the left side is called debit and the right side is called credit."
i think that above definiton is not correct.would some body explain to us the debit/credit definition.
bilal
<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote"> Contrary to popular belief and even some dictionary definitions, accounting debits and credits do not mean decrease and increase. The only constant definition of debits and credits is that debits are left-column entries and credits are right-column entries. In fact, debits and credits each increase certain types of accounts and decrease others. In asset and expense type accounts, debits increase the balance and credits decrease the balance. In liability, equity and income type accounts, credits increase the balance and debits decrease the balance.
deb·it (dbt)
n.
1. Accounting
a. An item of debt as recorded in an account.
b. The left-hand side of an account or accounting ledger where bookkeeping entries are made.
c. An entry of a sum in the left-hand side of an account.
d. The sum of such entries.
2. A drawback; a detriment.
tr.v. deb·it·ed, deb·it·ing, deb·its
1. To enter (a sum) on the left-hand side of an account or accounting ledger.
2. To charge with a debit The bank debited my account for the overdrawn check.
The fundamental concept of debit and credit is simple, yet confusing. To most ordinary people (accountants don't count) with a checking account at a bank, they are used to hearing debit and credit. That is the point of confusion I think.
When you go make a deposit of $100 into your checking account, the teller tells you that she credited your account with with $100. She also tells you that because you had a bounce check, they had to debit your account for $25.
That's how most people grow up understanding debit and credit. Debit is when they lose money and credit is when the gain money (see bank reference above). That kind of thinking is what confuse people when they first try to learn accounting. If you fall into that category, you need to stop thinking that way otherwise accounting won't make any sense to you.
Let's go back to the bank examples above. When the teller tells you that she credited your account for $100 and debited $20 for your bounce check fee, she's telling you that from her (the bank's perspective). Let's look at it from the bank's perspective. To the bank, your checking account is a liability. The money you deposit in your checking account is yours, and you could take it out at anytime. The bank does use your money for other purposes like making out loans or investments. That's how they make their money. While they use your money to make money, they owe you that money that should be in your account. That's why your account with the bank is a liability account to them.
In accounting, a liability account is a credit account. Think of credit as a negative number, and debit as a positive number. When you deposited your $100, you increased the value that was in your checking account, consequently the bank's liability for your account increased. Since a liability account is a credit (a negative number), and the bank need to increase your account, they need to credit (add a negative number) to your account. In other words, in order to make a negative number a bigger negative number, we add a negative number to it. Since credit is a negative number, the bank credit your account. That's why the teller told you she credited your account.
As for the $20 bounce check charge, the teller told you that the bank debited your account. Again, remember that your account with the bank is a liability account to them. When they deduct $20 from your account, they are reducing their liability to your account. Since a liability account is a credit (a negative number), and they need to reduce that negative number, they add a positive number to it. Adding a positive number is the same as debiting the account. Remeber that debit is positive and credit is negative.
Account Type -------- Debit(+) Credit(-)
ASSETS--------- Increases Decreases
LIABILITIES ------- Decreases Increases
EQUITY ------- Decreases Increases
INCOME ------- Decreases Increases
EXPENSES ------- Increases Decreases
---------------------------------------------
âLittle minds are tamed and subdued by misfortune; but great minds rise above it.â
- bilal azhar - 04-05-2005
Desert sleet,u have explained debit credit rules but my question is that how would u define debit and credit.in order to understand debit credit rules ones needs a lot of practise of journal enteries but imagine u are faced with a situation when a doctor or engineer ask u what is debit and credit.it will be quite embarassing for them if u starts explaining debit credit rules to them because they will not be able to understand it in a short period.
Here is a brief and complete summary of debit credit rules
(1) Debit which comes in
credit which goes out
(2) Debit The receiver
credit The giver
(3)Debit expenses/assests
credit income/liabilities
off course u have to take into account the increase/decrease rule as well.
bilal
- Mahtab - 04-05-2005
AOA
Bilal
The left side of the T-account is called Debit,
and the right side is called Credit.
One of the most difficult concepts for the new student of accounting is "Debits and Credits." Many of them try to associate them with plus (+) and minus (-). Well, as you know, this causes confusion, especially when you introduce something such as a contra asset account! I tackle this problem with what I call "BIG T - little t." I write a large "T" account on the board and label it Assets, Liabilities, and of course, Equity. I also label the two sides as "Debit Balance" and "Credit Balance" respectively. I then proceed to ask the students to name different asset, liability, and equity accounts and whether the account normally has a debit or credit balance. Once they properly identify the account (i.e., liability account/credit balance), I then ask where and how I should write the account within the "BIG T". Ultimately, I am instructed by the student to write a "small t" on the right or left side of the "BIG T," under asset, liability, or equity, as the case may be. I continue to explain and show them the relationships that debits and credits have with each account. They then begin to realize that debits increase debit balance accounts and that credits increase credit balance accounts and that the opposite (i.e., decrease) is true when you enter a credit on a debit balance account or debit on a credit balance account and so on. They also begin to understand that equal debits and credits can all be on one side of the "BIG T" (i.e., all assets or all equity, etc.) or can, of course, involve either or both sides and also include both balance sheet and income statement accounts.The key element is, I believe, the visualization of multiple "t" accounts contained within and interacting with the entire accounting system; the "BIG T."
put in the left column, say Debit
put in the right column, say Credit.
the left side of the t as "debit" and
the right side of the t as "credit"
There was an accountant that worked in the same office for 50 years. Every day, the man came to work and did the same thing. He would sit down at his desk, unlock it, open the top left drawer and look inside and close it. Then he would open the top right drawer and look inside and close it. Once that routine was complete, he would again lock his desk and work all day. When he finally retired, his office mates rushed to his desk to see what was in those two top drawers. In the left one was a sign that said "DEBIT" and in the right one was a sign that said "CREDIT."
avoid the potentially confusing debit and credit nomenclature. Instead, make sure that the equation,
Assets = Liabilities + Equity + Income - Expenses, is respected
Don't let the words Debits and Credits scare you. They simply refer to the Left side and Right side of a 'T Account'
In accounting, debit (DR) means left and credit (CR) means right. The left side of an account is called the debit side; the right side of an account is called the credit side
Debit A debit is the left hand side of an account
Credit A credit is the right hand side of an account
(above are quotation with Compliments & Thanks of diferrent Sites)
Regards
Mahtab
- Sahar_M - 04-12-2005
well i ant so highly qualified as u guys but if someone asks me wht is debit and credit .
i will say all the assets r dr while credit includes all liab + eqty.
wasay for further info u can search the net ,..... lets say google """ WHAT IS DEBIT ?""" ...
D
Sahar
- the_farhan - 04-13-2005
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well ur teacher is right, mr. bilal azhar. we used Financial Accounting by Meigs&Meigs, 11/ed. our teacher was mr. mumtaz anwar who is a very well known teacher in ICMAP n ICAP for a long long times.
this book tells tht debit n credit r latin words (if i remember the language correctly). debit means 'left-side' n credit means 'right side' in this language.
many ppl carry a misconception tht debit means tht something is increased, n credit means tht something is decreased due to accounting transations. it is wrong, it is only the matter of convention. in accounting, all the accounts can be categorized into five major types
1- Assets, 2- Liabilities, 3- Capital, 4- Revenues, 5- Expenses.
a 6th type might also be included as CONTRA ACCOUNTS, bcoz many accounts ve contra accounts also. eg Drawing is contra account for Capital, n <b>Sales Return and Allowances</b> is contra A/C for Revenues.
for above mentioned categories, the rules for debit/credit are
(1) <b>Assets </b> and <b>Expenses </b> increase on debit-side, and decrease on credit-side.
(2) <b>Liabilities, Revenues, </b> n <b>Capital</b>(owner's equity) increase on credit-side, n reduced on debit-side.
(3) contra accounts shall increase/decrease o opposite sides of the the actual a/c to whom they are countering.
these rules r thoroughly discussed, n practiced in Meigs&Meigs in first three chapters.
i think it suffices, n beginers of accounting will grasp these concepts easily.
</font id="Verdana">
FARHAN
live, n let live ...
- bilal azhar - 04-14-2005
Farhan i am not too sure about ur examples of contra entries.one contra entry which i know is when u receive a payment from a debtor who is also ur creditor.in this case a contra entry is usually made.i dont know whether the examples u have given are called contra enteries.can somebody tell us about the contra entries concept.
As we now have known that debit is a left side and credit is a right side.but one interesting fact is that P&L account and balance sheet are now a days made in statement form where there is no left or right side.I believe this practice has created misconception among common people that debit/credit are just plus/minus.because they see that some figures are subtracted from sale,and some added similiar is the case with cost of sales and gp.
bilal
- the_farhan - 04-15-2005
<font face="Verdana">
dear mr. bilal, if i m correct, balance sheets donot show accounts in debit/credit form. bal sheets r just in list-down form.
by contra entries, i meant those accounts tht reduce the balance of aforementioned five categories of accounts (assets, liability, capital, revenue, n expenses). any account tht is not a part of these five categories, n reduces the balance of these (except for expense n liabilities accounts) is called contra account bcoz it lowers our strengths of assets, or revenues or equity. but accou8nts or other sources tht reduce amounts of expenses or liability r always welcomed, so they r not contra accounts.
</font id="Verdana">
FARHAN
live, n let live ...
- Mahtab - 04-19-2005
AOA
Bilal
Why you are trying to define Debit & Credit to Doctors & Engineers?
Every profession and field have it own terms which is understood by the persons who are in the field and others do not understand it.
and in Accounting as others forum members discuss we present Accoutns in the Report Form for Layman,Doctos,Engineers etc.which is easily understandable by them.
Regards
Mahtab
- Shahid_fss - 04-19-2005
<b>There is no need to explain Dr and Cr to other people because when the information is given to general public it is in the form of statements (+/-) rather then Dr/Cr.</b>
<b>Well if someone forces me to define Dr and Cr I will define them as</b>
<u>Debit and Credit items</u>
When an item brings favorable effects for your business (business, not you) it is called Dr and vise versa.
<u>Debit and Credit sides</u>
Where a favorable Item is written is called Dr Side and where an unfavorable item is written is called Cr Side.
<b>Letâs prove (considering the habit of forum members to put objections - joking)</b>
<u>By favorable we mean better financial position</u>
If the value of total assets is increasing due to increase in the value of asset A, youâll debit âAâ because it is favorable for your business.
If the total liabilities reduce due to decrease in liability âXâ youâll debit it because it is favorable.
Considering drawings an asset (Although many people donât accept it but according to rule it is correct), drawings are always debit because due to them total liabilities are reduced, favorable.
<u>By unfavorable we mean bad financial position</u>
If the value of total assets is decreasing due to decrease in the value of asset A, youâll credit âAâ because it is unfavorable for your business.
If the total liabilities increase due to increase in liability âXâ youâll credit it because it is unfavorable.
Considering capital a liability (Although many people donât accept it but according to rule it is correct), capital is always credit because due to this total liabilities are increased, unfavorable.
<b>Always remember</b>
All those items due to which total assets or expenses increase are debit
All those items due to which total liabilities or incomes decrease are credit
If you remember these to lines, youâll never feel any problem in Dr and Cr.
<b>
All discussion given above is totally proved 100% in computerized accounting system based on âartificial intelligenceâ.</b>
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- mattis - 05-02-2005
Debit and Credit do not imply favorable or unfavorable. Every transaction has both a debit and credit side so if debit or credit were to imply favorable and unfavorable then every transaction would be both favorable and unfavorable. Further, an item that reduces your cash account could be favorable for a business. An example would be advertising expense that will cost you now but benefit you later by increased sales.
A different example where cash would be debited capital contributions would be a credit and a debit to the balance sheet. You would debit cash and credit equity. The question as to whether this benefits the business or not would then depend on whether the business is being overcapitalized or not.
- fahim239 - 05-03-2005
<b>DEBIT- </b> An entry recording an increase to an asset or expense or a reduction to a liability, revenue or a net asset (equity). The opposite of a credit.
<b>CREDIT-</b> An accounting entry acknowledging income or capital items.
ALL BE BLESSED!
fahim
- fahim239 - 05-03-2005
i hope this would have satisfied u!!!!!!!!!!!!!!!
though i cant say any definition can be final
fahim
- bilal azhar - 05-04-2005
we can clearly see from above posts that there is no universal definition of debit and credit.everybody is giving his own definitions.
i though now believe on mr.Farhans definition which says that debit and credit and latin words which means left and right hand sides respectively.MY teacher also told me this definition.
i think that other people who are saying about things such as increase in assets,or liabilites or favourable or unfavourable effects etc are talking about debit/credit rules and not about the pure definition of debit and credit,
bilal
- Mahtab - 05-30-2005
AOA
Bilal Azhar
I think Farhan define the topic very well
are you satisfy with it or NOT?
Regards
Mahtab