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In the accounting world, debit and credit are the sides of the same coin. An entry for any event and transaction is done in two accounts, i.e. debit and credit. It is a prominent way of accounting across all majors.
In double-entry bookkeeping accounting, the debit should always be equal to the credit to maintain the balance of the book. In a T-accounts book, the debit goes to the left side while the credit goes to the right side.
For example,
A company received an order of 10000 Euros. The products are supplied to the customer, but the amount is due to be paid after two months. So, here there are two things happening: the supplier’s product is going, and the customer is receiving the product. Similarly, the amount due is to be received by the company that the customer is entitled to pay. If you notice here, one event is giving rise to two areas of the transaction. One would go to the debit side and the other to the credit. We need to understand the debit and credit rules to understand what will be debited and what stands for credit!
Rules for Debit and Credit
There are four major rules of debit and credit.
Credit
The credit decreases when an additional debt comes over. It happens because the debit side is just at the contrast of credit, and thus an effect there would also reflect an impact here. The increase in the debit side indicates the company is receiving payment or supplying products on credit. Credit includes equity, liability, revenues.
Debit
The debit side increases when the debt goes up. Any increase in the credit must be balanced with a decrease in debt, and that is how both sides must be balanced. The debit includes assets, expenses and dividends.
Contra Accounts
These accounts are used for offsetting the balance. Contra account is very useful in balancing the debit and the credit side.
There are contra accounts in both assets as well as liability side. An increase in one side would lead to a decrease in the other.
Balance accounts
The final and most important account is the balance account. Here, the credit side is made equal and balanced for every occurring transaction. It constitutes the most basic rule for double-entry bookkeeping accounting. The end subtotal of the credit and the debit side must be equal, and if not, it indicates an error in the books.
These were the four basic rules of debit and credit accounts.
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