Accounting Fundamentals: Debit and Credit

Debit and Credit

Debit and credit are the two fundamental operations in accounting. They are the two sides of every financial transaction and help to keep the accounting equation in balance. In accounting, assets must always equal liabilities and equity. This balance is achieved by recording transactions with at least one debit and one credit.

Debit

A debit is a record of financial information on the left side of an account. It represents an increase in value or a decrease in assets. When a company has more assets than liabilities, the balance of the account is a debit. This means that the asset account has an increase in value, while the liability account has a decrease in value.

For example, if a company purchases a new piece of machinery, the cash account would be credited (the company paid money out) and the machinery account would be debited (the asset increased). In the accounting equation, this would increase the assets and decrease the cash, keeping the equation in balance.

Credit

A credit is a record of financial information on the right side of an account. It represents a decrease in value or an increase in liabilities and equity. When a company has more liabilities and equity than assets, the balance of the account is a credit. This means that the liability account has an increase in value, while the asset account has a decrease in value.

For example, if a company borrows money from a bank, the cash account would be debited (the company received money in) and the loans payable account would be credited (the liability increased). In the accounting equation, this would increase the liabilities and decrease the assets, keeping the equation in balance.

Normal Balance of an Account

Each account in the accounting equation has a normal balance, which is the expected balance based on the type of account. Assets and expenses have a debit balance, while liabilities, equity, and revenues have a credit balance.

Expanded Accounting Equation

The expanded accounting equation is used to analyze transactions and maintain the balance of the accounting equation. The equation is:

Assets = Liabilities + Equity

This equation can be expanded to include the debit and credit sides of each account:

Assets = Liabilities + Equity

Assets = Liabilities + Dividends + Revenues - Expenses - Drawing Accounts

This expanded equation helps to understand the impact of each transaction on the accounting equation and ensures that the balance is maintained.

In conclusion, debit and credit are the two fundamental operations in accounting that help to maintain the balance of the accounting equation. Understanding the normal balance of each account and the expanded accounting equation is essential for accurately recording and analyzing financial transactions.