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Debit and Credit Definitions
Business transactions are events that have a monetary impact on the financial statements of an organization. When accounting for these transactions, we record numbers in two accounts, where the debit column is on the left and the credit column is on the right.
A debit is an accounting entry that either increases an asset or expense account, or decreases a liability or equity account. It is positioned to the left in an accounting entry.
A credit is an accounting entry that either increases a liability or equity account, or decreases an asset or expense account. It is positioned to the right in an accounting entry.
Debit and Credit Usage
Whenever an accounting transaction is created, at least two accounts are always impacted, with a debit entry being recorded against one account and a credit entry being recorded against the other account. There is no upper limit to the number of accounts involved in a transaction - but the minimum is no less than two accounts. The totals of the debits and credits for any transaction must always equal each other, so that an accounting transaction is always said to be 'in balance.' If a transaction were not in balance, then it would not be possible to create financial statements. Thus, the use of debits and credits in a two-column transaction recording format is the most essential of all controls over accounting accuracy.
There can be considerable confusion about the inherent meaning of a debit or a credit. For example, if you debit a cash account, then this means that the amount of cash on hand increases. However, if you debit an accounts payable account, this means that the amount of accounts payable liability decreases. These differences arise because debits and credits have different impacts across several broad types of accounts, which are:
Asset accounts. A debit increases the balance and a credit decreases the balance.
Liability accounts. A debit decreases the balance and a credit increases the balance.
Equity accounts. A debit decreases the balance and a credit increases the balance.
The reason for this seeming reversal of the use of debits and credits is caused by the underlying accounting equation upon which the entire structure of accounting transactions are built, which is:
Assets = Liabilities + Equity
Thus, in a sense, you can only have assets if you have paid for them with liabilities or equity, so you must have one in order to have the other. Consequently, if you create a transaction with a debit and a credit, you are usually increasing an asset while also increasing a liability or equity account (or vice versa). There are some exceptions, such as increasing one asset account while decreasing another asset account. If you are more concerned with accounts that appear on the income statement, then these additional rules apply:
Revenue accounts. A debit decreases the balance and a credit increases the balance.
Expense accounts. A debit increases the balance and a credit decreases the balance.
Gain accounts. A debit decreases the balance and a credit increases the balance.
Loss accounts. A debit increases the balance and a credit decreases the balance.
If you are really confused by these issues, then just remember that debits always go in the left column, and credits always go in the right column. There are no exceptions.
Debit and Credit Rules
The rules governing the use of debits and credits are as follows:
All accounts that normally contain a debit balance will increase in amount when a debit (left column) is added to them, and reduced when a credit (right column) is added to them. The types of accounts to which this rule applies are expenses, assets, and dividends.
All accounts that normally contain a credit balance will increase in amount when a credit (right column) is added to them, and reduced when a debit (left column) is added to them. The types of accounts to which this rule applies are liabilities, revenues, and equity.
The total amount of debits must equal the total amount of credits in a transaction. Otherwise, an accounting transaction is said to be unbalanced, and will not be accepted by the accounting software.
Debits and Credits in Common Accounting Transactions
The following bullet points note the use of debits and credits in the more common business transactions:
Sale for cash: Debit the cash account | Credit the revenue account
Sale on credit: Debit the accounts receivable account | Credit the revenue account
Receive cash in payment of an account receivable: Debit the cash account | Credit the accounts receivable account
Purchase supplies from supplier for cash: Debit the supplies expense account | Credit the cash account
Purchase supplies from supplier on credit: Debit the supplies expense account | Credit the accounts payable account
Purchase inventory from supplier for cash: Debit the inventory account | Credit the cash account
Purchase inventory from supplier on credit: Debit the inventory account | Credit the accounts payable account
Pay employees: Debit the wages expense and payroll tax accounts | Credit the cash account
Take out a loan: Debit cash account | Credit loans payable account
Repay a loan: Debit loans payable account | Credit cash account
Examples of Debits and Credits
Arnold Corporation sells a product to a customer for $1,000 in cash. This results in revenue of $1,000 and cash of $1,000. Arnold must record an increase of the cash (asset) account with a debit, and an increase of the revenue account with a credit. The entry is:
| Debit | Credit |
| Cash | 1,000 |
| Revenue | 1,000 |
Arnold Corporation also buys a machine for $15,000 on credit. This results in an addition to the Machinery fixed assets account with a debit, and an increase in the accounts payable (liability) account with a credit. The entry is:
| Debit | Credit |
| Machinery - Fixed Assets | 15,000 |
| Accounts Payable | 15,000 |
Other Debit and Credit Issues
A debit is commonly abbreviated as dr. in an accounting transaction, while a credit is abbreviated as cr. in the transaction.
Debits and credits are not used in a single entry system. In this system, only a single notation is made of a transaction; it is usually an entry in a check book or cash journal, indicating the receipt or expenditure of cash. A single entry system is only designed to produce an income statement.
Related Courses
Accountants' Guidebook
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Bookkeeping Guidebook
All profit-making businesses involve purchase and sales transactions. This can be purchase and sale of goods or/and services. These transactions happen on the basis of invoices that specify several details including customer name, tax registration numbers, specifications of goods and services supplied, price at which supplied, discount terms, payment terms etc. However, occasions may arise when supplied goods or services may be returned by the purchaser back to the seller. These returns must also be accompanied by specific documents specifying similar details.
This article looks at meaning of and differences between two of these documents – debit note and credit note.
Definitions and explanations
Debit note:
A debit note is a document issued by a buyer/customer to a seller/supplier specifying the details of goods returned by him.This is essentially documentary evidence of a purchase returns transaction. When goods are returned by a buyer, he would be entitled to receive the related monetary amount back from the seller, hence he would be debiting the account of the seller in his books. This is the reason for the name – debit note.
A debit note contains several details, broadly including:
- Debit note number
- Date
- Name and address of buyer (issuer)
- Name of seller (recipient)
- Description of goods returned
- Reason for goods returned – damage, wrong goods, excess goods received etc.
- Quantity of goods returned
- Rate and price of goods returned
A debit note must accompany goods returned by the buyer. In case of damaged goods, where there may be no physical return of goods, debit note serves as an intimation of the same.Once a debit note is issued by a buyer, he will record an entry for purchase returns in his books of accounts.
Credit note:
A credit note is a document issued by a seller/supplier to a buyer/customer indicating that he has received goods or received intimation of goods returned by the buyer. This is essentially documentary evidence of a sales returns transaction. When goods are received back by a seller, he would be liable to repay the related monetary amount back to the buyer, hence he would be crediting the account of the buyer in his books. This is the reason for the name – ‘credit' note.
A credit note for sales returns can be issued for several reasons such as receipt of returned damaged goods, receipt of returned incorrect goods, receipt of returned excess goods, over-invoicing etc.
A credit note mentions similar details that are mentioned in a debit note, except that a credit note is issued by a seller to a buyer.
Once returned goods are received by a seller, he will issue a credit note to the buyer and record sales return in his books of account.
Difference between debit note and credit note:
The difference between debit note and credit note has been detailed below:
1. Meaning
- Debit note is an accounting document issued by a buyer to a seller stating that the seller's account has been debited in the books of the buyer, for a purchase returns transaction.
- Credit note is an accounting document issued by a seller to a buyer stating that the buyer's account has been credited in the books of the seller, for a sales returns transaction.
2. Prepared and issued by
- Debit note is prepared and issued by a buyer or customer who intends to return goods purchased by him.
- Credit note is prepared and issued by a seller or supplier who has received returned goods from his customer.
3. Timing of preparation
- Debit note is prepared before damaged, incorrect or excess goods are returned by the buyer. Debit note may also be prepared in case of over-invoicing.
- Credit note is prepared after returned goods are received by the seller.
4. Received by
- Debit note is received by a seller or supplier of goods.
- Credit note is received by a buyer or customer.
5. Accounting treatment
- Issue of debit note results in recording of purchase returns transaction in the books of accounts of the buyer:
Seller a/c [Dr]
Purchase returns a/c [Cr]
(Being – purchase returns recorded on issue of debit note to seller)
Difference Between Debit And Credits
- Issue of credit note results in recording of sales returns transaction in the books of accounts of the seller:
Sales returns a/c [Dr]
Buyer a/c [Cr]
(Being – sales returns recorded on issue of credit note to buyer)
6. Impact on finances
- Issue of debit note, results in increase of receivables for the buyer.
- Issue of credit note, results in increase of payables for the seller.
7. Followed by
- Preparation and issue of debit note is generally followed by physical return of damaged, excess or incorrect goods.
- Preparation and issue of credit note is generally followed by repayment (or adjustment of dues) by the seller to the buyer for goods returned.
Conclusion – debit note vs credit note
Debit Card Vs Credit Card
Accounting function requires documentary evidence. Documentary evidence serves as the basis of accounting on which accounting entries are made in the books of accounts. This documentary evidence subsequently serves as audit evidence and is essential to carry out the audit function of business accounts. Debit notes and credit notes are one of the important documentary evidences that support recording of purchases and sales. These are typically generated by accounting software and ERPs. They may be e-delivered or physically delivered depending on the type of business arrangement between the transacting parties.
Debit And Credit Difference In Banking
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