Difference Between Debit & Credit in Accounting
Double-entry accounting uses two columns to track financial transactions. The column on the left is a debit column and the column on the right is a credit column. Each transaction is recorded twice. This provides a means of checking and balancing the accounts to ensure accuracy.
Business people have money that is owed to them, money on hand, and money they owe. Tracking cash flow provides the details the business needs to know to understand how the business stands in relation to how much money is coming in and how much is going out. This provides critical information for the business owner to make decisions about expansion or cutbacks. It also provides tracking information in case of an audit by taxing authorities.
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Debit Definition
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In accounting, a debit is entered on the left column. A debit can increase or decrease an account depending upon the type of account that is affected. Expense and asset accounts are increased when a debit is entered while liability, owner's equity, and revenue accounts are decreased with a debit entry.
Credit Definition
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Credits are entries made on the right hand side of the two column double-entry accounting system. Liabilities, owner's equity and revenue accounts are increased with a credit entry, while assets and expenses decrease with a credit.
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History
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Luca Pacioli was a Franciscan monk who grew up when the first printed books were available. He formalized the double-entry bookkeeping system. This helped to keep business financial records straight as the final balance would always equal zero. Pacioli formalized the work of a 1300 Florentine bookkeeper and a 1340 Genoese accountant who each had developed a part of the modern accounting method.
Pacioli wrote a book on mathematics the year after Columbus's first voyage. Most of the book fell into disuse. The section of his book on double-entry bookkeeping was reprinted and translated into numerous languages. It was used to teach accounting students well into the 19th century.
Significance
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In accounting, a debit and an equal credit is recorded into a general ledger. The totals of both columns are checked. If they are equal, they are transferred into the individual accounts. This method of entering the same transaction as both a credit and a debit keeps financial records accurate. By using double-entry accounting methods, including trial balances and other financial statements, errors can be discovered and eliminated.
Benefits
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An accounting system can summarize volumes of transaction data into useful financial statements and reports. Payrolls are accurate, reported and all taxes are paid by the tracking ability of double-entry accounting systems using debits and credits. Modern computer accounting software is based on the double-entry bookkeeping system, though most casual users would not realize it as it is done in the background of the computer program.
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References
- Photo Credit business accounts image by Nicemonkey from Fotolia.com
