Debit and credit are terms that are often used in the world of accounting and finance. The most common difference between debit and credit is that debit is defined as an increase in money, while credit is defined as the expenditure of money in the transaction process.
However, in banking terms credit is better known as the provision of money on a loan agreement between the bank and its customers. Here, the bank gives customers a period of time to pay off or install their loans.
Overall, the difference between debit and credit cannot be interpreted as an increase or decrease in savings. For the purposes of financial statements, the difference between debit and credit is not that simple. For more details, here is an explanation of the differences between debit and credit that you must understand.
Definition of Debit and Credit in Accounting
In the world of accounting debit and credit are two things that cannot be separated. Both have a close and complementary relationship. Every time there is a transaction, debit and credit will always be side by side.
To make it easier to understand, here is a more complete explanation of debit and edit to know the difference between debit and credit thoroughly.
Definition of Debit
Starting with a discussion of the origin of the word debit which comes from the word debere from Latin which means accounting records where assets and costs have increased. Debits will usually be on the left side and additional assets can be in the form of additional money, equipment, supplies to intangible assets such as leases and receivables.
The term credit is an accounting record for debt and equity accounts that have increased. Credit is usually located on the right side with the Latin name credere. If an asset or expense is in the credit position, it means there is a reduction in the account. Conversely, if accounts payable, accumulation and equity are in the debit position, it means that these accounts have increased in value.
Difference between Debit and Credit in Accounting
In every accounting transaction, at least these two accounts will always be affected. The accounts in question are the debit column and the credit column. The transaction will be recorded in one debit account and one credit account. There is no limit to the number of accounts recorded in each transaction, but at least no less than two accounts.
The total transactions recorded in debit and credit for each transaction must be the same between one and the other so that the transaction can be said to be balanced or balanced. If a transaction is not balanced, it will affect the financial statements.
That way the use of debit and credit in a two-column transaction recording format is important. Here’s a reference to the difference between debit and credit that you should understand:
- Debit refers to the left side of the ledger account, while credit is on the right side of the ledger account. In the account, the recipient will be recorded in the debit account while the giver in the credit account.
- All incoming financial transactions are recorded in the debit account on the balance sheet. While any outgoing transactions are recorded in the credit account.
- In the income statement, all expenses and losses are recorded in debit, while income is written in credit.
- An increase in debit is caused by an increase in cash, inventory, machinery, equipment, land, buildings, insurance. The increase in credit is caused by an increase in shareholders’ funds, expenses, retained earnings, debt and others.
From the explanation above, it can be concluded that the difference between debit and credit is as follows:
- Debit is a recording of a reduction in the nominal amount of money while credit is a recording where money increases.
- Debit transactions can be interpreted as saving activities at the bank while credit can be interpreted as borrowing activities at the bank.
- Debit is a record of the reduction of savings or deposits.
Proper Use of Debits and Credits in Accounting
In order to better understand the difference between debit and credit well, here is an explanation of the use of both in accounting along with the account names of the use of debit and credit in accounting.
Asset
The first account that uses debit and credit is assets. Assets or commonly referred to as assets are divided into two, namely fixed assets and current assets. Current assets are assets or assets that are most easily disbursed or liquid. Some liquid accounts in current assets include cash, business counters, machinery, vehicles and office equipment. So when the asset increases, its position is in debit while if it decreases it will be in credit. That’s the difference between debit and credit in asset accounts.
Expenses or the term expense can be interpreted as expenditures that must be made so that the business or business can continue to run. For this expense, it will also increase if debited and will decrease if credited. That is the difference between debit and credit in terms of expense accounts.
Liabilities and Equity
Furthermore, the difference between debit and credit is also found in debt and equity accounts.
Accumulation
The last account that deals with debit and credit differences is the part of non-current assets that can increase in value if credited, namely accumulation. Accumulation in the balance sheet will later reduce the value of fixed assets such as vehicles, and tools. By recording the accumulation of vehicles or tools, it will make it easier to assess whether the asset has suffered a loss or gain when it is resold.
In debit or credit transactions, the two cannot be separated because they are always related. Although the difference between debit and credit is very prominent, both are closely related in every transaction made. Business financial management is not just about managing finances. Knowledge of the relationship and differences between debit and credit is very important in supporting the sustainability of your business.
Debit and Credit Differences in Banking Terms
In addition to the difference between debit and credit in accounting terms, you will also find the difference between debit and credit in banking terms. As a customer you will have two card options that can be used to make transactions. One of the differences between debit and credit in banking includes the features they have.
In the banking world, there are still many who do not know the difference between the two cards, namely the difference in debit and credit. As a result, many people misinterpret debit and credit cards. The following is the difference between debit and credit in the banking world.
Definition of Debit
Debit or debit cards are cards issued by the bank as a complement to savings accounts in general. Each savings account has one debit card to make it easier for you to transact using the money in the savings. The requirements for issuing a debit card by the bank are very simple, it is enough that you have a bank account. There is no transaction limit on debit cards, but make sure your savings account is not empty.
Definition of Credit
A credit card is a card that can be used to pay for transactions with a credit limit and certain conditions. Later there will be a bill for transactions that have been made in a certain period. Credit cards that are commonly used do not require a card issuing bank account because the source of funds is not taken from the account. Usually, banks will set a number of conditions for issuing credit cards to their customers. The requirements for each type of credit card product will differ depending on the bank’s policy.
Although it does not have a source of funds, there is a credit card limit provision which is the maximum limit of card usage. The advantage of using a credit card is that you can also make cash withdrawals through regular ATMs with a small additional fee. In addition, credit card users will get other benefits such as installments with 0 percent interest or points that can be exchanged for certain prizes.
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