Posted in Finance, Accounting and Economics Terms, Total Reads: 630
Debit refers to an accounting entry that increases the assets and expenses or decreases the liability, owners’ equity and income of a financial statement (balance sheet / income statement). Conventionally, debit is reported on the left side (Dr.) of ledger accounts. As we follow a double-entry book-keeping system, the converse of a debit entry has to be recorded simultaneously, which called a credit entry is reported on the right side (Cr.) of ledger accounts.
Such an entry however impacts the accounts of the two parties involved in a transaction in reverse manner. An example everyday transaction will make this clear:
When an individual withdraws cash from its bank account, his/her assets (cash) increase, resulting in a debit. But at the same time, another of his asset (bank account balance) decreases, resulting in a credit. Similarly, for the bank, asset (liquid cash) decreases (Cr.) and liability (payable to customer) also decreases (Dr.).
Simultaneous recognition of debits and credits must abide by the equation:
Sum of debits = Sum of credits
Derived from this term is ‘debtor’, an individual or entity who debits the account of another individual or entity (a ‘creditor’ to the debtor) by actions such as remitting previously taken loans.