Debits and credits are the accounting terminologies which are used to describe the increase or decrease in the financial components. Any movement in these components can be specified by using the term debits and credits. In T-accounts, left column represents debits while right column represents credits.
Rules of Debits and Credits
There are five components of financial statements
Each Component has its own criteria for debits and credits. Sometimes students may face a general problem in specifying when to use debit or credit terminology so to tackle these problems there is a general rule. See the Table A below
In table you can notice when there is increase in asset and expense they are debited and when there is a decrease they are credited. On the other hand Liability, Capital and Revenue, when they are increased they are credited and debited when decreased.
John bought a car of 3000$ from Dj motors on credit.The above transaction is hitting two heads i.e. asset, “a car and liability, Dj motors.
In john books of accounts, his assets and liabilities both are increasing so for assets he has to debit a car and for liability he has to credit Dj motors. Following journal entry will appear in his books:
John paid electricity charges amounting to 50$ so hence john is increasing his expenses (debit) while his asset i.e. cash is decreasing (credit). Therefore entry in his books will be
During the year john received a dividend of 120$ from his investments in stock market. Here revenue (dividend) & asset (cash), both are increasing so the journal entry would be as follows
John withdraws 500$ from his business for his personal use. In this situation his capital is decreasing (debit) in form of drawings and his cash is also decreasing (credit).