Principles of Debit & Credit

Debit and credit are very common terms in accounting, and continue to be important throughout all levels of the accounting industry. For those unacquainted with the terms they can be complex concepts. Credit and debit can seem interchangeable because of the way both can increase and decrease money in accounts, but they operate based on a clear set of accounting principles.

Debit Actions

In accounting terminology, money is credited and debited to specific accounts, not to the business itself. To say that a business was "credited" money it receives is largely meaningless when it comes to accounting principles. In accounting, money credits certain accounts and debits others at the same time, keeping the accounts balanced. Every transaction has both a debit and a credit.

As a general rule of thumb, accountants debit what comes into the company. This means, for instance, that if a business was to increase its assets, this would be a debit to the account. If a business buys office furniture, then the business assets are increased (a debit) just as a liability to pay the furniture company is created (a debit). The normal balance of asset, expense and dividend accounts are all debit: In other words, they increase as they are debited.

Credit Actions

The general rule of credit is to credit what goes out of the business. When inventory leaves the company, it is "going out" while cash is received for the items. This increases accounts receivable (a credit) while also increasing the cash account (a debit). Liabilities, revenues and equity are increased with credits. These are the "credit" accounts that decreases when they are debited.

Increases vs. Decreases

Because different accounts increase and decrease when comparing debit and credit, many people become confused. However, the theory remains sound: Money only changes accounts, it does not stop existing, so credit and debit show the redistribution of money, and if it is coming into or leaving the business.

A debit decreases a liability account when it is paid (and the liability no longer exists) but increases an asset account when it is received. Sometimes two accounts increase. For example, if investors buy stock, the profit the business makes will increase the cash account as a debit, but will also increase the equity account by the same amount (signifying outgoing value), balancing out.

Creditor and Debit Cards

There is confusion about the terms due to their common use in certain circumstances. Creditors collect money and when something is credited to an account, it is often increased. However, this only reflects particular aspects of credit: Creditors represent money that has already gone out of the company and now exists as a borrower liability.

Likewise, a debit card is used to immediately transfer money from a cash account, signifying an immediate increase to expenses (a debit account) and a credit to the cash account.