What is debit is known not only to accountants. Understanding how to operate “debit” and “credit” helps even those who are not familiar with accounting, to put in order cash flows in the enterprise and to streamline the family budget. But to use accounting functions, you need to know all their capabilities and nuances.
Debit and credit in simple words
FACT! Debit – funds transferred to the account, profit. These are the finances that the company received for work, including secondary ones. For example, for the sale of products, lease of premises. This also includes debts of borrowers, “receivables”.
The loan is classified as a financial expense. This is the money spent or supposed to be debited from the account: expenses of the enterprise on material and technical support, payments to employees, banking and other financial institutions, counterparties and business partners, taxation and state excise taxes. If events develop favorably, the indicators are located in harmony and balance, and the amount of money credited prevails over the spent.
Debit and credit are the main instruments by which it is determined in what economic condition the enterprise is. Based on these data, it is possible to track the state of affairs at a given time, calculate the net income, the profitability of the organization as a whole or its directions. Postings, that is, schematic records of business transactions in accounting, have a debit part. She points to the recipient of the funds.
FACT! The wording “To bring debit with credit” means summing up the balance, that is, comparing these indicators.
If the first of them on active accounts is greater than or equal to the second, the enterprise has achieved economic success. This can be shown with an example:
Imagine that a company sold its products for a month for 2 million €. This will be the debit amount. But at the same time, 1.5 million € had to be spent on production. This is the loan amount. When mixed, it turns out that the debit is 500 thousand € more than it. It can be concluded that the organization’s activities are profitable.
How debit differs from credit
What these concepts have in common is that they:
- fix the financial condition of the organization;
- reflect the profitability of the activity;
- show the effectiveness of transactions.
Further, there is nothing in common between them: they are opposite processes.
The debit indicates how much and for what reason the assets of the enterprise increased. This is the profit of the organization from all areas of activity, basic and additional. This term also refers to the amount of assets of a company.
The loan shows how the assets included in the balance sheet have decreased. These are all the expenses of the enterprise on materials that allow them to carry out the main activities, the payment of salaries to employees, transfers to counterparties, payment of taxes and similar areas. You can show it as the cost of creating assets, organizing income and profits.
So, debit and credit differ in the display of economic processes, but they are used for one thing – the characteristics of the financial condition of the organization. Their ratio and balance are key criteria for the well-being of an enterprise.
What is debit turnover
Turnovers represent the amounts formed on the accounts during any time period. Simply put, the debit turnover will reflect how much property, assets, money have grown. It is calculated as the sum of all debit accounts. Credit turnover will show the totality of transactions of financial costs. Crediting or debiting, receipt or spending of money on the account is made constantly, therefore, the position of the organization is different at different times.
To obtain objective data on the well-being of the organization, the results are calculated for a certain period of time. For example, monthly, quarterly and yearly. The difference between the received and spent money for any time period is called the “balance”, and in good conditions it should always be positive: more than 0. This is the debit balance.
In accounting, debit turnover refers to the amount of transactions displayed on the debit of the account without the balance at the beginning of the period – the total of the company’s economic activity for the previous period of time, and credit – the amount of transactions displayed on the credit also without the opening balance.
Active and passive accounting accounts, sub-accounts
Accounting is compulsory for each company and is required to display movements in three types of accounts:
Active accounts fix assets, they are needed in order to account for household funds. They can contain both debit and credit information. The first will reflect the amount of money and where it came from, the second – how much material objects and funds have decreased. There is also a debit balance, it can be equal to 0. That is, the active accounts take into account the amounts at the disposal of the enterprise. According to the Chart of Accounts, assets are numbered with the following codes: from 01 – “Fixed assets” to 97 – “Deferred expenses”.
- include only the debit balance at the beginning or end of the period;
- for a loan, transactions are recorded for spending assets, and for debit – for their crediting;
- in the active balance sheet, they show the balance, which means the presence of a monetary asset.
To calculate the final balance for the period, you need to subtract the amount of credit from the amount of the balance of the initial and debit turnovers.
Passive accounts display information about liabilities: costs, debts and financial liabilities of the company. By debit, they record wages, tax, excise and other mandatory payments. For a loan – receipts from creditors. In other words: for debit – a decrease in liability, for a loan – its increase. Numbering of passive lines in the balance sheet: 02, 05, 42, 59, 63, 66, 67, 70, 77, 80, 82, 83, 96, 98. For example, the debit of account 60 is information about how much business partners owe the enterprise, which is equal to their “accounts receivable”. A loan on the same account will show what debt the organization has to partner companies.
Passive accounts are needed to combine sources of amounts that are accounted for by an asset. They have the following features:
- postings mean an increase in sources of credit;
- in debit, they show a decrease in amounts;
- the balance, in contrast, is only a credit one.
To calculate the balances at the end of the reporting period, the debit amount is subtracted from the amount of the balance of the initial and credit turnovers.
There are also active-passive accounts: they can be specified in two opposite lines of the balance. Depending on the results of the organization’s work, they are able to include residuals that are prescribed only from one side.
Accounts that do not have balances are distinguished separately. They do not take part in drawing up the balance sheet and belong to the settlement: the balances on them at the end of the month period are transferred to other accounts, and these are “closed”. If the books are kept correctly, residual amounts may appear on these accounts, but they must be reallocated at the end of the month.
IMPORTANT! A countable division is necessary in order to correctly post balances. Having identified the sign of the account, it is easy to understand where to send the residual amount – in debit or in credit. Also, the division into active and passive accounts simplifies the procedure for determining which balance sheet section to send the balance to.
In addition, there are synthetic and analytical accounts. In the first, property or liabilities are reflected in general terms, in which accounting is always carried out in monetary terms. Secondly, detailed information is recorded for each type of property or liability. They are opened in addition to synthetic ones. In this case, the residual amounts on the latter and the turnovers on them must be equal to the balances and turnovers of all additional analytical accounts. Here, for the convenience of accounting, sub-accounts are used – an intermediate link between the main synthetic account and additional analytical ones.
Double entry in accounting
Another significant concept that allows you to clarify the essence of credit and debit. In the balance sheet of any organization, the same money is reflected in the debit of one account and in the credit of the second. It turns out counting interaction or correspondence.
FACT! Double entry is an accounting method in which any change in the state of the company’s funds is recorded on two or more accounts, creating an overall balance.
This method makes accounting transparent. It allows you to generate reliable information on the company’s business operations, to immediately see where the money came from and how it was redistributed. This shows the accuracy of the accounting entries.
Debit and credit plastic card
Banking plastic also works on the principle of credit and debit. Credit cards provide access to the account to which the bank transfers the loan to the client, limited by the limit under the agreement. A simple card on which the salary is charged is a debit card. At the same time, by agreement with the bank, an overdraft can be opened for it. In this case, the owner of the plastic will be able to spend more than he put on the card. He will return the “minus” funds at the next replenishment of the card. They will be written off automatically.
The main purpose of a “credit card” is to spend money that does not belong to the owner. It is easier to arrange it than to take a cash loan. This is convenient, although the interest rate is usually higher. However, almost all credit institutions offer a grace period, when you can pay off debt without interest.
The main goal of accounting is to maintain the value balance: what amount falls out of the loan, the same should be sent to the debit balance. And vice versa: how many values have come, the same amount goes away. But understanding what debit is is important not only for people professionally related to accounting, but also for private entrepreneurs. It is also useful to apply the basics of accounting when managing a family budget.