Commercial transactions are events that have a financial impact on an organization’s financial statements. When you do these transactions, you record numbers in two accounts. Here, the debit column is on the left and the credit column is on the right.
A Debit is an accounting entry that increases an asset or expense account or decreases a liability or equity account. It is placed to the left of the accounting entry.
Credit are accounting entries that increase a liability or capital account or decrease an asset or expense account. It is placed to the right of the accounting entry.
The rules governing the utilization of debits and credits are as follows:
- Generally, all accounts that contain a debit balance will increase in amount when a debit (left column) is added and decrease in amount when a credit (right column) is added.
- Secondly, all accounts, including regular credit balances, increase in amount when credits (right column) are added and decrease when debit (left column) is added to the account.
- Further more the total amount of debits must be adequate to the entire amount of credits for the transaction.
Use of Debit and Credit
Each time when an accounting transaction is journalize at least two accounts affects , a debit and a credit . Accounting transactions are always said to be “balanced” because the sum of the transaction’s debits and credits must always be equal to each other. To sum up if the transactions are not stabilize , you will not be able to prepare financial statements.
Asset = Liability + Capital
In a sense, you can own an asset only if you have paid it in debt or capital. Therefore, to own one, you must own the other. Therefore, when you create a transaction using debits and credits, you typically increase your assets while increasing your liabilities or capital accounts (or vice versa). There are some exceptions, like increasing one asset account and decreasing another. The accounts which appears in your income statement, the following additional rules is applicable:
- Revenue Account. The debit reduces the balance and the credit increases the balance.
- Expense Account. The debit increases the balance and the credit decreases the balance.
- Get an Account. The debit reduces the balance and the credit increases the balance.
- Loss Account. The debit increases the balance and the credit decreases the balance.
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