WHAT IS AN ACCOUNT? What is DEBIT and CREDIT ?

What is an account?

An account is an individual accounting record which records increase or decrease in specific asset, liability, or stockholder’s equity.

For example: Cash, Equipment, Accounts Receivable, Accounts Payable, etc. form an account. (Note: specific account name is capitalised)

An account in its simplest form consists of three parts: (1) Title (2) Left side or Debit (3) Right side or credit. Since it resembles letter T therefore it is called T-account. 

Debit and Credit

Debit represent the left side of the account and credit represent the right side of the account. Debit is abbreviated as Dr. and credit is abbreviated as Cr. Debits and credits does not mean increase or decrease as it is commonly thought. Debit are transfer of value to the account. Credit are transfer of value from the account.

Therefore Debit increases assets, expenses, and dividends. Credit increases revenues, liabilities, and common stock.

As we know, the basic accounting equation:

Assets= Liability + Stockholder’s Equity

And Stockholder’s Equity= Common Stock + Retained Earnings

Also retained earnings = Revenues – Expenses – Dividends

Therefore Stockholder’s Equity = Common Stock + Revenues – Expense – Dividends

Thus,

 Assets = Liability +Common Stock + Revenues - Expenses – Dividends

Now if we move the negatives to the left hand side, then we have

Assets + Expenses + Dividends = Liability + Common Stock + Revenue

Since debit is the money going out of the account. Debit increases the left side of the above equation i.e. debit increases the assets, expenses, and dividends. Therefore increase in these accounts results in outflow of money thus an debit account.

Credit is the money flowing into the account. Credit increases the right side of the above equation i.e. credit increases liability, common stock, and revenue. Therefore increase in liability, common stock, and revenue results in inflow of money and thus represents the credit account.

To record or enter an amount on the left side or debit of an account is called debiting and similarly entering an amount on the ride side or credit of an account is called crediting.

Balance

Balance or normal balance is the difference between debit and credits. Normal balance is recorded where there is increase in the account. When debit exceeds credit (Dr>Cr) then it is debit balance and when credit exceeds debit (Cr>Dr) then it is credit balance.