Financial statements are an integral part of the business transaction. The organization’s profit and loss statements are made by drafting a record of its debit and credit. On the left of the record is the debit column while on the right it has the credit column. But, before drawing any statements, do you know how to differentiate between credit and debit in accounting?
In simple terms, debits and credits are qualities to monitor incoming and outgoing money in your business account. The organizations aim to keep their accounts in “In balance” by keeping their debit and credit amount at the equal stand. Now, the debits and credits leave different impacts on the financial transactions of the different banks. To mention the broad types of accounts, there are:-
- Assets Account
In this type of account, the debit amount increases the balance while the credit decreases the balance.
- Liability Account
In the liability account, a debit decreases the balance and a credit.
- Equity Account
The 3rd type of accounting account is the Equity account. In this account, the debit decreases the balance, and the credit increases it.
Like the debit and credit, you must also be thorough with some financial terms:-
Comparisons Between the Debit and Credit
Debit
- The debit means an increase in assets or a decrease in liabilities and owner’s equity.
- On the left-hand side of the T-format ledger is the debit.
- The personal account involved in debit is that of the receiver.
- Phrase for the amount received in the real account is, ‘what comes in’.
- And lastly, for the nominal account, the debit is both expenses and losses.
Credit
- The credit means a decrease in assets or an increase in liabilities and owner’s equity.
- On the right-hand side of the T-format ledger is the credit.
- The personal account involved in credit is that of the “Giver”.
- The phrase for the amount received in the real account is, ‘what goes out’.
- And lastly, for the nominal account, the credit is both income and gains.
You must also like giving a read to:-
Important Debit and Credit Rules
Rule 1# For the Accounts With Debit Balance
In the case of such accounts, the amount increases on the addition of the debit and is reduced on the addition of the credit.
Types of account included under this rule are:-
Expenses, Assets, and Dividends
Rule 2# For the Accounts With Credit Balance
In the case of such accounts, the amount increases on the addition of the credit and is reduced on the addition of the debit.
Types of account included under this rule are:-
Liabilities, Revenues, and Equity
Rule 3# The Transaction Rule
In this rule, the total amounts of debits and credits should be equal, or an unbalanced state shall arise, which is unacceptable by the accounting software.
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