Mudalovers, surely you have heard and are familiar with the terms debit and credit. This term is not only like a type of card, but debit and credit also have different definitions.
This term is often used in the world of financial accounting. If you look at it from the accounting side, the difference between debit and credit will be seen, namely that debit is an increase in money and credit is defined as an expenditure of money in the transaction process.
So, Mudalovers, to find out what the difference is between Mudalovers debit and credit, you can read the full review below.
Understanding Debit and Credit in Accounting
In the world of accounting, debit and credit are two things that cannot be separated. The two have a close and complementary relationship. Every time there is a transaction, debit and credit will always be present side by side. So that you can understand more easily about debit and credit, here is the meaning of debit and credit.
Definition of Debit
The word debit is a word that comes from debere from Latin which means accounting recording. Where there are funds in the form of assets and costs that have increased.
If it is recorded, the debit will usually be on the left side. As for additional assets, it can be in the form of additional money, equipment, supplies and intangible assets such as rent and receivables.
Understanding Credit
The word credit comes from the Latin word credere. The word credit in accounting is the recording of debt and equity accounts that have increased.
For writing, usually the credits will be on the right side. If an asset or expense is in a credit position, it means there is a reduction in that account. On the other hand, if the debt, accumulation and equity accounts are in a debit position, this means that this account has experienced an increase in the value of the account.
Difference between Debit and Credit in Accounting
In every accounting transaction calculation, both accounts will always be affected. Transactions will be recorded in one debit account and one credit account. The total calculation of transactions recorded in debit and credit for each transaction must be the same so that the transaction can be said to be in balance .
If transactions are not balanced , it will affect the financial statements. Therefore, having debits and credits in a two-column transaction recording or calculation format is important.
There are several references to the differences between debit and credit that you should understand below.
- Debit refers to the left side of the general ledger account, while credit is on the right side of the general ledger account. In the recipient’s account, it will be recorded in a debit account and conversely, the giver’s account will be recorded in a credit account.
- All incoming financial transactions are entered into a debit account on the balance sheet. Meanwhile, any transactions that come out are recorded in a credit account.
- In the income statement, all expenses and losses are recorded as debits, while income is written as credits.
- An increase in debit is generally caused by an increase in cash, inventory, machinery, equipment, land, buildings, insurance. Meanwhile, the increase in credit was caused by an increase in shareholder funds, costs, retained earnings, debt and others.
So, it can be concluded that the differences between debit and credit are:
- Debit is a recording of a reduction in the nominal amount of money, while credit is a recording of an increase in money.
- Debit transactions can be interpreted as savings activities at the bank, while credit can be interpreted as borrowing money at the bank.
- Debit is a recording of a reduction in savings or deposits.
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Proper Use of Debits and Credits in Accounting
In order to understand the difference between debit and credit well, here is an explanation of the use of both in accounting.
1. Assets
The first account in accounting that uses debit and credit is assets. Assets or also known as assets are divided into two, namely fixed assets and current assets. Current assets are assets or assets that are easiest to disburse or are in liquid form.
Some liquid accounts in current assets include cash, trade receivables, vehicle engines and office equipment. So, when assets increase, their position will be in debit, while if they decrease, they will be in credit. That is the difference between debit and credit in an asset account.
2. Load
Expenses or also known as expenses can also be interpreted as expenditure that must be made so that the business can continue to run. This expense also increases if it is debited and will decrease if it is credited. That is the difference between debit and credit from the expense account side. Examples of out-of-pocket expenses are monthly expenses and daily necessities.
3. Liabilities
Liabilities are financial obligations that increase by law. Examples of these liabilities are bank loans, ewa, mortgages and also taxes.
4. Equity
Equity is the difference between total assets and liabilities. This is the net amount found by subtracting the amount of money that has been invested from the total income. Examples of equity are common shares, owner’s equity, retained earnings, treasury shares.
5. Income
Income can come from various kinds of activities that make money. Examples of what is included in income are interest income, royalties, sales.
Understanding Debit and Credit in Banking Terms
Apart from the world of accounting, debit and credit also exist in the world of banking. If you become a bank customer, you will definitely have two card choices, namely a debit card and a credit card. Both have different features and benefits too. So, to find out more clearly, see the review below.
Definition of Debit
A debit or debit card is a card issued by the bank as a complement to savings accounts in general. Each savings account will have a debit card to help you make transactions using the money in the savings account.
The requirements for having a debit card by the bank are very simple, namely you just have to have a bank account. On the debit card itself there is no set limit and you just have to make sure your savings are not empty.
Understanding Credit
A credit card is a card that can be used to pay for transactions with a credit limit and certain conditions. Later a bill will appear for the transactions the customer has carried out within a certain period.
Credit cards that are commonly used do not require a card issuing bank account because the source of funds is not taken from the account. Usually banks will set a number of conditions for issuing this credit card to customers.
Even though it doesn’t have a source of funds, this credit card has a credit card limit which is the maximum limit for using the card. The advantage you get from using this credit card is that you can also make cash withdrawals via ATM. Customers who have a credit card will also usually get other benefits such as 0% installments and points to exchange for certain prizes.
Difference between Debit and Credit in Banking Terms
From the definition above, the difference between debit and credit in banking is divided into three things, namely:
- Debit is a recording of the addition of money in savings, while credit is a recording of a reduction in the nominal amount of money in savings.
- Debit transactions can be interpreted as savings activities at the bank. However, credit transactions can be interpreted as activities of issuing or withdrawing money from the bank.
- Credit cards usually have a valid usage limit. Meanwhile, Debit Cards do not have a valid usage limit.
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Debit and Credit Transactions in the International Balance of Payments
Apart from the world of accounting and banking, debit and credit are also known in the international balance of payments. The international balance of payments itself is a balance sheet used to record economic transactions between citizens of one country and citizens of another country within a certain time period. The following is the meaning of debit and credit in the international balance of payments.
1. Debit Transaction
International economic transactions that result in payment obligations abroad. Debit transactions in NPI are marked negative (-)
Examples of debit transactions in the Overseas Balance of Payments are:
- Goods balance: imports of goods from other countries
- Service balance: payment of services to overseas communities and payment of tourism costs abroad
- Balance of capital returns: interest and dividend payments
- Capital balance: the amount of credit given abroad in the form of debt installment payments
- Long-term accounts payable and receivable balance: represents purchases of bonds from abroad.
2. Credit Transactions
Credit transactions are international economic transactions in the form of receiving income rights from other countries. Credit transactions in NPI are given a positive sign (+)
Examples of credit transactions in the international balance of payments are:
- Goods balance: export of goods to other countries.
- Services balance: service receipts from overseas communities and tourism receipts from overseas.
- Balance of capital returns: interest and dividend receipts.
- Capital balance: represents credit obtained from abroad in the form of debt installments.
- Long-term accounts payable and receivable balance: selling bonds abroad.
Examples of Debit and Credit Transactions
How can you differentiate between debit and credit transactions that occur every day? So you can understand further, below are examples of debit and credit transactions.
Debit Transactions
- Selling merchandise using a cash system to consumers, the debit account is Cash.
- Selling merchandise using a credit system to consumers, the debit account is Accounts Receivable.
- Purchasing equipment in cash from a supplier, the debit account is Supplies.
- Purchase equipment on credit from a supplier, then the debit account is Equipment.
- Receiving cash or repayment of business receivables from clients or customers, the debit account is Cash.
- Purchasing fixed assets on credit from a supplier, the debit account is Fixed Assets.
- Purchasing inventory items in cash from a supplier, the debit account is Inventory.
- Purchasing inventory items on credit from a supplier, the debit account is Inventory.
- Paying employee salaries, the debit account is salary expenses
Credit Transactions
- Selling merchandise using a cash system to consumers, the credit account is Revenue.
- Selling merchandise using a credit system to consumers, the credit account is Revenue.
- Purchase equipment in cash from a supplier, then the credit account is Cash.
- Purchase equipment in cash from a supplier, then the credit account is Accounts Payable.
- Receiving cash or repayment of trade receivables from clients or customers, the credit account is Accounts Receivable.
- Buying fixed assets on credit from a supplier, the credit account is Accounts Payable.
- Purchasing inventory items in cash from a supplier, the credit account is Cash Credit.
- Purchasing inventory items in cash from suppliers, the credit account is Accounts Payable.
- Paying employee salaries then the credit account is cash.
Benefits of Debit and Credit
Using debit and credit certainly has its own benefits. Following are the benefits of debit and credit.
Benefits of Debit
The following are the benefits of debit:
1. Simple and Practical
When you become a customer of a bank, you will definitely have a savings book and ATM card or debit card. With this card you don’t need to queue long when you want to withdraw money because you can look for an ATM machine and withdraw money there. Debit will also make it easier for you to deposit money into savings via an ATM machine.
2. Mobile Savings
This can be said to be mobile savings because the savings in your account can be taken anywhere. Apart from being able to withdraw money wherever there is an ATM machine, with this debit card you can shop, eat at restaurants without using cash and just swipe at the existing EDC machine.
3. Safer
When you need a large amount of money, you don’t need to be afraid of carrying that cash everywhere. With a debit card, you can carry the money in your savings without being seen by other people.
4. Free monthly installments
Debit card users do not need to pay monthly installments like credit cards. Because you will spend money according to the nominal amount in your account. If the balance in your account is sufficient to pay for all of this, then the items you will pay for will be paid in full immediately.
5. No interest or penalties
Debit cards do not have interest or penalties when using them for transactions or paying outstanding bills. This is because, when the card is swiped, your account balance will be deducted according to the expenditure required or the groceries you purchased. That way, you don’t have any remaining bills.
Credit Benefits
The following are the benefits of credit:
- Credit can increase the usability of capital.
- Credit is useful as a medium for increasing national income.
- Credit can increase the usability of a product or item.
- Credit can be a tool to stabilize the economy.
Read Also : What is Cash Receipt? Definition, Benefits, and How to Get It
The Importance of Recording Debits and Credits in a Company
A company will of course carry out transactions, both internal and external transactions, both credit and debit. From various existing transactions, a company will ultimately create transaction documents in the form of financial reports.
Apart from that, the function of financial reports is to determine the flow of incoming and outgoing company finances to minimize the possibility of excess funds being loaded on certain account categories in the reporting. Companies that do not have debit and credit reports will find it difficult to control the company’s financial inflow and outflow.
Then, if something happens to the company, its financial data cannot be traced. By recording debits and credits, corruption and other fraudulent actions by employees are also avoided.
So, that’s an explanation of the difference between debit and credit. Now we can know what the difference is between debit and credit. Hopefully all the discussion above can broaden your insight.
If Mudalovers want to read about accounting or banking article, then Mudalovers can read the article at mudabicara.com.