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I will start this with the below example and then let us try to interpret the meaning of debit and credit.
You have decided to start a business selling burgers and for this, you have induced an amount of 10,000 in your business. Now to start this business, you will need raw materials i.e potato, peas, spices and buns you will also require a premise on rent, electricity and assets like oven and furniture.
You have enough money to buy required materials like potatoes, buns etc. covering electricity charges and paying rent but you do not have enough cash flows to buy an oven and other furniture so you take a loan from your friend Anna.
Now you have all the items and so you have started selling burgers in quarter 1 you have generated decent revenue. After 6 months, you have enough cash to pay off the loan.
To understand the term debit and credit you need to first have a basic knowledge of Modern rules of accounting
|For Assets||An increase in an asset is debited and a decrease in an asset is credited.|
|For Liabilities||An increase in liability is credited and reduction of liability is debited|
|For Capital||An increase in the owner’s capital is debited and a decrease is thereby debited.|
|For Income||An increase in an income is credited and a decrease in an income is debited|
|For Expenses||An increase in an expense is debited and a decrease in an expense is credited.|
Assuming you have received at least an idea of modern rules of accounting moving ahead to answer your question-“Meaning of Debit and Credit”.
I will try to simplify these rules using the above scenario it will help you understand the meaning of debit and credit:
- When you begin the business by inducing the capital the amount is received in the business and so the available cash for the business increases i.e additional cash is added to your business and so the asset balance increases and hence, we debit it.
- When you bring in the cash it increases the owners capital and hence it is Credited
- Now to buy furniture and an oven, you do not have cash so what you do is you borrow from your friend so you add to your liability and so it is credited as there is an increase in a liability.
- Now your business has been commenced and so revenue is generated so you add the amount received to your earnings and as per the above rules increase in an income is credited.
- Now you do not have a property to carry on this business hence to have taken the property on rent and for that, you incur monthly rental expenses ultimately it adds up to your spending and so its debited.
- Assuming your business is successful after a year and you want to buy a larger oven so you sell off the older one thus you will have to subtract it from your asset balance and add the new asset hence you will credit the asset account since the balance is reduced and debit it when you buy a new one.
- Also now you have enough cash flows so you intend to repay the debt i.e you subtract from your loan liability since there is a decrease in liability, in this case, you will debit it.
- You take party orders as well and one of your clients had become insolvent so you were unable to recover the money but turns out that client paid off that amount it’s a reduction of expense (Bad debts) so you will credit it.
- After a year you are in an urgent need of cash so you withdraw a part of your capital in such a case such amount is subtracted from the capital and your capital reduces so it is debited.
You should note that there is no specific definition for Debit and Credit in accountancy but still I have tried to explain it as simply as I can.