Debits and Credits

In accounting, the basic tenet is that for every transaction, the total debits must equal the total credits. This fundamental principle ensures that the accounting equation remains balanced and that there is no discrepancy in the financial records.

Let’s further clarify the relationship between debits and credits:

The Double Entry System:

• Every transaction involves at least two accounts.
• One account is debited, and another account is credited.
• The total amount debited must always equal the total amount credited.

Balancing Debits and Credits:

1. Debit (Dr.):
   • Indicates the left side of an account.
   • Represents an increase in assets or expenses or a decrease in liabilities or equity.
2. Credit (Cr.):
   • Indicates the right side of an account.
   • Represents a decrease in assets or expenses or an increase in liabilities or equity.

Examples:

1. Cash Purchase of Goods:
   • Debit: Inventory (Asset) – To record an increase in inventory.
   • Credit: Cash (Asset) – To record a decrease in cash.
2. Sale on Credit:
   • Debit: Accounts Receivable (Asset) – To record the amount receivable.
   • Credit: Sales Revenue (Equity) – To record the revenue earned.
3. Payment of Salaries:
   • Debit: Salaries Expense (Expense) – To record the expense incurred.
   • Credit: Cash (Asset) – To record the cash outflow.

Importance:

• Accuracy: Ensures that transactions are recorded correctly.
• Consistency: Maintains uniformity in recording transactions.
• Accountability: Facilitates the preparation of reliable financial statements.