What is Debit and Credit An Easy to Understand Explanation

Debit and Credit, are key parts of any accounting entry. These are the fundamental
effect of each financial transaction. For maintaining correct accounting records,
you must have full knowledge of what is Debit and what is Credit.
In the double entry system of book keeping, you have two columns for entering your
transactions. It is a basic understanding that an entry to the left side column is
Debit and an entry to the right side column is Credit. Debit & Credit are shortly
mentioned as Dr. and Cr respectively. Any kind of transaction has two effects. So for
every debit there is a corresponding credit of equal amount. In order to understand
debit and credit entries, it is important to understand what are the different account
types and rules for debit and credit in each account type apart from a clear idea on
five accounting elements.
DEBIT AND CREDIT RULES FOR 3 DIFFERENT ACCOUNT TYPES
There are three Account Types. All accounts have been classified into either of
Real, Personal or Nominal accounts. The rules for entering transactions into these
groups of accounts are as follows:
DEBIT WHAT COMES IN AND CREDIT WHAT GOES OUT REAL ACCOUNTS
Real accounts constitute all assets like Building, Land, Road, Machinery, Plants,
Constructions, Furniture and other Equipments. When they are purchased you debit
the respective account with the amount. When it is sold or removed, you credit the
account with its value.
DEBIT THE RECEIVER AND CREDIT THE GIVER PERSONAL ACCOUNTS
Personal accounts constitute the accounts of an owner, partners, shareholders
(Capital and Drawings Account), customers and suppliers (Debtor or Creditor) etc.
When a payment is made to somebody, you debit the receiver of that payment and
credit Cash or Bank as money is paid from cash or by means of cheque. When
money or cheques are received, you credit the person who is paying you and you
debit the cash or bank.
DEBIT ALL EXPENSES AND LOSSES NOMINAL ACCOUNTS
Credit all incomes and gains. Nominal accounts constitute all expenses and income
accounts and also profit or loss. You debit the expenditure account whenever some
expenditure is incurred and credit the income account whenever income is received.
Income accounts include interest received, rent received, and profit or surplus, etc.
UNDERSTANDING FIVE ACCOUNTING ELEMENTS
Modern accounting equation principle consists of five accounting elements. They
are Assets, Liabilities, Income or Revenue, Expense, and Equity or Capital.
All financial transactions are classified according to their nature of the transaction
and grouped into the above five groups of accounts. Let us have a basic concept of
these elements to properly understand the accounting rule of debit and credit.
Assets: Assets are normally debits. They constitute companys movable and
immovable property and goods. They include items of Cash balance and Bank
balance also in addition to vehicles, buildings, furniture and bills receivable and
interest receivable etc. All these items add to the asset of business. When some
asset is sold, it is posted on the credit side of the account.
Liabilities: Liabilities are credits. They indicate the amount payable by the company
to creditors such as bills payable, loans, overdraft, etc. These accounts normally
have credit balances.
Equity/ Capital: Capital refers to the paid-up capital of the company along
with equity shares. This constitutes the companys fund invested in business. It is
repayable to the owner and the shareholders of the company. So it is a liability. It
will be a credit balance always.
Income/ Revenue: This group of accounts shows the income received by the
company by way of sale of goods or services or by any other form of interest
received, profit on the sale of assets, commission etc.
Expenses: Expense includes all expenditure items incurred such as rent, cartage,
electricity, postage, travel, stationery, bank charges, etc.
EXAMPLE EXPLAINING CREDITS AND DEBITS
Each credit and debit entry requires a correct perception of the nature of a
transaction. To make the picture clear, let us have an example and see how the
transaction has an effect on each of the above 5 accounting elements by following
the rules of Real, Personal and Nominal account as discussed above
difference between trial balance and balance sheet
Difference between Trading
and Profit and Loss Account
and Balance Sheet:
The basic difference between the Trading and Profit and Loss Account and the
Balance Sheet lies in their need for preparation, structure and form.

1 The Trading and Profit and Loss Account is prepared to ascertain the results
. of business operations during a given period whereas the Balance Sheet is
prepared to know the financial position of the business at a particular date.
2 Revenue and expense accounts are shown in the Trading and Profit and
. Loss Account while in the Balance Sheet, only those accounts appear, which
remain open after the preparation of the Trading and Profit and Loss Account.
3 The Trading Account and Profit and Loss Account is a ledger account; it has
. debit side and credit side and its balance is transferred to the Capital
Account. The Balance Sheet is only a statement of Assets and Liabilities.

there are many differences between a trial balance and a balance sheet. For example, a
trial balance is an internal report that stays in the accounting department, while a balance
sheet is a financial statement that is distributed to other departments and often outside the
company to investors and lenders.

The trial balance is a built-in report in most accounting software programs which lists the
ending balance in each account, typically at the end of each reporting period.

The trial balance can be used to make certain that total debits equals total credits, to
perform an audit of the ending balances in accounts, to build a working trial balance that
includes adjusting entries, or to create a balance sheet and income statement in the
absence of any software specific to those purposes.

The trial balance proves information at the account level, and is therefore more granular. It
includes the balances of real, nominal and personal accounts.

rial Balance Balance Sheet

1 It is prepared to verify the arithmetical 1 It is prepared to disclose the true
accuracy of books of accounts financial position of the business
2 It is prepared with balances of all the ledger 2 It is prepared with the balances of
accounts assets and liabilities accounts.
3 It is not a part of final accounts
4 It is prepared before the preparation of final
accounts
5 It may be prepared a number of time in an
accounting year.
6 Generally, it includes opening stock but not
closing stock.
7 There is no rule for arranging the ledger
balances in it.
8 It is not required to be filed to anybody.
9 Auditor need not to sign it.
3 It is an important part of final
accounts.
4 It is prepared after the preparation of
trading and profit and loss account.
5 It is generally prepared once at the
end of accounting year.
6 It always includes closing stock but
not opening stock.
7 Assets and liabilities must be shown
in it according to the rule of
marshaling.
8 It must be filed with the registrar of
companies if the business is a
company.
9 Auditor must sign it.