Debits and credits are financial terms that are widely used in accounting and bookkeeping. They refer to the two sides of every financial transaction and help maintain accurate records of a company's financial activities.
In accounting, a debit is an entry recorded on the left side of an account, while a credit is an entry recorded on the right side. Debits and credits are used to record increases and decreases in different types of accounts such as assets, liabilities, equity, revenues, and expenses.
The concept of debits and credits is based on the double-entry bookkeeping system, where every transaction affects at least two accounts. It follows the fundamental principle that every debit entry must be balanced by a corresponding credit entry.
Debits are used to record increases in assets and expenses, as well as decreases in liabilities and equity. On the other hand, credits are used to record increases in liabilities and equity, as well as decreases in assets and expenses.
The debit and credit system helps ensure that the accounting equation (assets = liabilities + equity) remains in balance. Each transaction should have equal debits and credits, thereby maintaining the equilibrium within the financial records.
In summary, debits and credits are crucial tools in accounting that allow for accurate record-keeping by providing a systematic method for capturing and balancing financial transactions. They serve as the building blocks for financial statements and reports that allow businesses to assess their financial health and make informed decisions.
