When you hear the terms debit and credit, using a debit or credit card probably comes to mind. In accounting, debit and credit are terms used to describe increases in values of assets, items or accounts that increase your net worth, and liabilities which are known as a legally binding debt. You can see your debits and credits within your bookkeeping records, which is also commonly known as left side and right side accounting.
A debit is a bookkeeping term that is a result in an increase of an asset and/or a decrease in a liability. For example, if a company receives a payment, it is considered a debit because it is increasing their cash flow, which is an asset. If you make a payment toward a bill, it is also considered a debit because it is reducing a liability.
The term credit can mean different things depending on what type of an account you are working with. When working with a liability account, a credit increases the liability. Because the liability has increased, the asset is decreasing. It is being used in a way similar to a credit card. If you are working with an income account, the term credit means that the credit is increasing the amount in the account. A credit can also mean a decrease in expenses.
The terms debit and credit allow for more organized accounting. Debt entries in bookkeeping are entered in the left side of the accounting ledger, and credits are entered in the right side of the ledger. If you think of it in a similar way of balancing your checkbook, everything you spend, the debits, are entered on the left side columns, and deposits are entered on the right side, the credits.
There are no benefits, advantages or disadvantages of these terms. Debits and credits are not positive or negative. They should only be thought of in terms of what side of the ledger the transactions belong in.
It is very easy to think of debit and credit in banking terms, like debit cards and credit cards. While the banking terms of debit and credit have some applicability in the accounting terms of debit and credit, they are different and their applications are different as well.
Because these terms can be confusing, especially since there can be misconceptions about the definition of credit and debit, and if you are confused about applying the terms of credit and debit to your own bookkeeping, you may want to consult with an accountant. Accountants have expert knowledge on how to account for debits and credits in bookkeeping ledgers.
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