Debit and Credit
The terms, debit and credit are the fundamentals of accounting that date back to almost 500 years ago. This system of segregating the transactions into debit and credit categories is a very old one, and it is still in effect, as one of the accounting fundamentals. This system of debit and credit is not only used for financial reporting purposes only. These terms are equally important in finance, taxation and management accounting.
Usually, when the term debit is used, it means that someone owes you something to normal people. Similarly, when the term credit is used, they think that they owe someone's money. Although these terms can be perceived generally like that, this is not the right way to define them properly in accounting. The understanding of the debit and credit is necessary in accounting since this helps the trainee accountants (and qualified accountants too) to understand the nature of the transaction. Since the transactions are of five types, the accountant needs to be able to define the nature of these transactions to segregate them properly for the financial reporting purposes. These transactions are:
The understanding of debit and credit is also necessary because double book entry system and T-accounts are based on these principles. A transaction that is carried out has two parts: one debit and the other credit.
In T-accounts, the debits are always on the left side and the assets and expenses of the company are debit in nature. Since the assets of the business are the business property that is why they are debit in nature. Similarly, since the expenses reduce the income of the company, they are also debit in nature.
In T-accounts, the credit items are always recorded on the right side and credit items include the liabilities, incomes and equity of the company. Since the liabilities of the company are the money owed by company, and it has to be paid back, it is a credit in nature. Similarly, the equity of the company is the money of shareholders so it also has to be paid back due to separate legal entity concept.