Tuesday, 1 January 2013

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What Does DEBIT Mean..? What Does CREDIT Mean..?

Debit means ‘post in the debit side of an account’ and credit means ‘post in the credit side of an account’.
Debit side is the left hand side of an account and credit side is the right hand side of an account
                                                                      ………..Account
Debit Side
Credit Side



Rule of debit and credit is different for different accounts. Normally there are five categories of accounts. They are;
1.      Asset Accounts (Buildings, plant, furniture, cash, inventory, debtors etc.)
2.      Expense Accounts (salary, rent, electricity, depreciation etc.
3.      Liability Accounts (debentures, loans, creditors, outstanding expenses etc.
4.      Income Accounts (interest, dividend, commission, fees etc. received)
5.      Capital Accounts. (equity share capital, preference share capital etc.)
Every transaction in a business organization affects (increase/decrease) any two of above accounts. 
How it affects? 
That is the rule of debit and credit.
Rule of debit and credit (when to debit an account and when to credit an account)

Account
Effect
Debit/Credit
Assets
increase
debit
decrease
credit
Expenses
increase
debit
decrease
credit
liabilities
increase
credit
decrease
debit
Incomes/revenue
increase
credit
decrease
debit
capital
increase
credit
decrease
debit


So,
·         identify the two accounts in a transaction,
·         then see the effect of transaction on the accounts,
·          and decide which account is to be debited and which account is to be credited