What is a debit and credit balance
“Debit and credit” is perhaps the most famous accounting phrase that even those who are far from the topic of finance know. But do you understand what it is, and can you explain the essence of the concept of debit and credit in simple terms? It’s actually pretty easy.
Debit and credit – what is it
What is reflected in debit and credit?
Profits (assets) and expenses (debts). Any action in any organization necessarily has two operations – income and expenditure. Regardless of the profile of the company and other parameters, the income and expenditure statements will be in any case.
To make accounting easier, general terms were adopted that are universal for everyone today – in fact, these are debit and credit. If we talk about etymology, “debit” is translated as “someone owes”, and “credit” as “I owe”. From this follows the main essence of these terms:
debit – receipt, in the account it is displayed on the left and has the abbreviation “DT”;
credit – a waste, in the account it is displayed on the right and has the abbreviation “CT”.
Debit and credit examples
Let’s try to make out what is called, “on the fingers.” Let’s say that you are going to the store (since you will take the money for the purchase in it to the cashier, let’s call it “Cashier”). There is a budget of conditional 100,000 rubles, which you are going to spend in it. So, you came and bought a suit for 100,000 rubles. It turns out that the amount from the “credit” (your wallet) went into debit (to the “Cashier”). To correctly display this process in accounting, we will enter this money (the entire amount) into the statements twice: in the “debit” column and in the “credit” column.
Important: money will always come in debit and leave credit – this is called double posting, which is why we write the amount twice. Debit – part of the transaction that indicates the person (person or organization) who received the money. Credit indicates the source of money.
What is a debit and credit balance
Debit balance is another key term that is used when we talk about the excess of the total amount of debit compared to credit. The credit balance, respectively, is the excess of the amount of the loan in comparison with the debit.
Let’s say we decide to open a fireworks shop in the summer. Let’s take the simplest conditions as an example: we do not take a loan, we do not have borrowed funds, and we have not even purchased the goods yet. But we have a buyer who is already ready to purchase our fireworks in the amount of 100,000 rubles. The nuance is that he needs fireworks for the New Year, so the buyer is ready to pay for the goods and leave it with us for storage until the right time.
Since the client does not need fireworks yet, he simply pays us 100,000 rubles and waits for winter. It turns out that the amount left the buyer and entered our cash desk – this is the standard double posting procedure that we described above.
Let’s say we decided to put 90,000 rubles out of the 100,000 received in a bank account. Then we take the money from the cash desk (i.e., write it down as an expense – credit) and transfer it to the account (write it down as income – debit).
Now we finally find a supplier of fireworks and conclude an agreement with him, say, for 160,000 rubles. By agreement, we transfer half of the advance payment (80,000 rubles on credit), and we will pay the rest after receiving the goods. We transfer 80,000 rubles from the current account to the supplier.
We get ready-made fireworks, the total cost is 160,000 rubles. Accordingly, the amount of 160,000 rubles (the cost of the goods) is debited to our “Warehouse”, and our credit goes to the supplier’s account – 160,000 rubles.
The results will be summed up according to the results of the first month of work.
Credit and debit turnover
It’s time to calculate the debit and credit turnover.
Debit turnover is all operations on debit (income), credit – on credit (expenditure). Let’s break down our accounts:account “Purse of the buyer” – credit turnover of 100,000 rubles, debit so far 0;
account “Cashier” – credit turnover of 90,000 rubles (which we deposited in the bank), debit turnover of 100,000 rubles (which we received from the buyer);
account “Settlement account” – credit turnover of 80,000 rubles (advance to the supplier), debit turnover of 90,000 rubles (which we deposited in the bank);
account “Supplier” – credit turnover of 160,000 rubles, debit turnover of 80,000 rubles;
“Warehouse” account — credit turnover 0 (because we have not issued a single unit of goods yet), debit turnover 160,000 rubles.
Debit balance example
Now our task is to get the balance of the accounts. Such a balance is called the “final balance”, to calculate it, simply minus one turnover from the other (respectively, the smaller one is subtracted from the larger one). The best way to do this in this situation is to use the example of a bank account.
We put 90,000 rubles on it (in debit), and wrote off 80,000 rubles in advance to the supplier (on credit). Accordingly, the balance will be 10,000 rubles. We write this amount in debit, as this is our profit.
We take another account – for example, “Supplier”, and we think: everything is a little different here, since the balance comes out in credit, since we have 80,000 rubles in debit, and 160,000 rubles in credit.