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Principles of Accounting: Debit Vs Credit

The basic fundamental concept in accounting is that every debit has a credit. We will now discuss the same debit vs credit in more details so that you get a better idea. If there is a debit there has to be a corresponding credit somewhere else the final accounts will not match. If you get this in your head then accounts will become very simple to you.

Let me give an example. Debit is generally reffered to something that comes in a credit is for something that goes out of the business. If you take a loan of five thousand then you will have to either pay it or make provision for paying the same. This is the basic concept. If you just take a loan and forget to account for the payment you will not be able to tally the accounts.

Double Entry System

This rule of debit and credit in accounting is also called as the double entry system. In many accounts you will see that the debit is denoted with a plus sign and the credit is denoted with a negative sign. This is the basic concept on which the whole accounts depend on. As we all know that if you don’t understand the basic you will not be able to do well. This is exactly why we stress a lot on how debit and credit system of accounting works.

Suppose you have to make an entry for furniture purchased. When you do so you have to keep the double entry system in mind you cannot only increase the furniture and forget the other aspect of the transaction.

Just think once when you buy furniture you get new furniture and what you lose is money or cash. This makes the two aspects of the accounts. This is exactly why furniture account will be debited as furniture is coming in and the cash account will be credited as cash is going out. I hope by know you have got an idea of how accounting works.

We will now move into the different type of accounts that will help you to understand the concept of debit and credit even better. There are totally three types of accounts.

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They are

  1. Real accounts
  2. Personal accounts
  3. Nominal accounts

Each account stands for something different. Real account is an account that deals with elements that we can touch and feel. This is exactly why real account works on a simple logic.

Debit what comes in and credit what goes out of the business. Example of real accounts is cash account, goods account, etc. When you look at an accounting entry just check if you are losing something or gaining something, based on that you can decide which account to debit and which one to credit.

The next type of accounts is the personal accounts. As the name it suggests this account deals with individuals. The person who receives something from the business is debited and the one who gives something to the business is credited. For example if cash is paid to one of the partners named Mr Kumar then the accounting entry will be as follows: Cash a/c credit and Mr Kumar a/c debit. You must keep one thing in mind that the accounting entry can be into both real and personal accounts. It is not necessary that you touch only real account or only personal account.

The last or the third type of accounts is the nominal account. This account basically deals with transactions. The concept is simple debit all expenses and credits all incomes. Name of some accounts that come in this category are cash account, bank account, wages account, etc. For example when a salary is paid the logic is simple cash is going out and the employees are being paid. This is exactly why salary account is debited and cash account is credited.

The nominal account also takes into consideration loses and profits. Any loss will be debited and profits will always be credited.
This is the very basic of accounting and the principle of debit and credit. There may be some entry where you may touch more than two accounts. However, even in that case the concept of debit and credit remains the same.

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