What does debit mean | A simple guide for company owners
Tips / 29.11.2021
Bookkeeping and accounting are not everyone’s cup of tea. They involve an in-depth knowledge of numbers and an accurate way of putting each one where it belongs in a firm’s general ledger. While you’re right to think that this profession involves numbers, to make things even more complicated, there is also a specific terminology that’s used.
Some of these terms are debit and credit, and they actually form the building blocks of any accounting or bookkeeping practice. If you’re wondering “what is debit?”, you’ve come to the right place as we explain this concept in simple terms, enabling you to get on top of your accounts better.
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What does debit mean in simple terms?
A brief definition would look something like this – debit is the term that’s used in accounting and bookkeeping to indicate the addition of value to the business. This means either an increase in the business’ assets or a decrease in their liabilities.
How does debit work?
So, how does debit work? Essentially, accountants use a T-shaped entry system, which is a single page that’s divided into two halves. The left side contains debit transactions, while the right-hand side contains the credit transactions. In their abbreviated forms, “debit” is abbreviated to “dr” while “credit” to “cr”.
There are various reasons for such abbreviations, some of which just plain border on the historical, but there’s no need to go into this right now.
What is important is to note that for every debit entry, there should be an equal and opposite credit entry as there needs to be a net balance in terms of each of your entries for the books to balance.
Is debit good or bad?
To have a positive debit account means your assets have increased or your liabilities (debts) have decreased. This is generally a favourable situation. However, keep in mind that for every debit transaction, an equal credit entry is entered in your ledger in order to have a balance.
Here’s an example of this: say that you’ve sold 100 socks for 100 GBP. This means your debit balance will increase by 100 GBP because you’ve earned income. However, your inventory of socks or assets has decreased by 100 items. This is where the double-entry system comes into play.
What is a debit payment?
A debit payment is a payment that results in an increase in your assets or a decrease in your liabilities. For example, if you receive a payment for goods and services that you offer your customers, your account will increase and the debit side of your ledger will accordingly increase.
Similarly, if you pay certain monies to a debtor to reduce your debt, sure, there will be less money in your merchant account, but your debt would subsequently decrease too. Remember that debts are considered business liabilities.
What’s the difference between debit and credit?
We already covered the meaning behind debit above, but let’s look at the meaning of credit and compare the two.
Generally, credit is the opposite of debit. It means a decrease in assets and an increase in liabilities.
Higher credits don’t signal a strong or healthy balance sheet.
Now that you know the debit meaning, and you’ve realised it’s not as difficult or complicated as it first appears, we hope you’ll be able to tackle your accounts head-on with no fears. Debit is simply a term used to show how much you have of something in the positive sense.
However, it’s vital to keep in mind that it also corresponds with credit, and these two small but powerful words each play a role in the balancing of the accounting equation. Therefore, remember the T-shaped general ledger system above and keep in mind that when one side falls, the other increases and vice versa.
Disclaimer: Please be aware that the contents of this article and the myPOS Blog in general should not be interpreted as a legal, monetary, tax or any other kind of professional advice. You should always seek to consult with a professional before taking action, since the particulars of your situation may materially differ from other cases.
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