A debit refers to an entry made on the left side of an accounting ledger or financial statement, representing an increase in an asset account or a decrease in a liability or equity account.
What is debit?
Debits are one of the fundamental principles of double-entry bookkeeping, which is used to maintain accurate records of financial transactions. In double-entry bookkeeping, every financial transaction involves at least two accounts – a debit and a credit.
Debits can affect different types of accounts in various ways:
- Assets: Debits increase asset accounts. For example, when a business receives cash from a customer, it records a debit to the cash account, reflecting an increase in cash on hand.
- Expenses: Debits increase expense accounts. For instance, when a business pays for office supplies, it records a debit to the supplies expense account, indicating a decrease in assets and an increase in expenses.
- Drawings (Owner’s withdrawals): Debits increase the drawings account, which represents withdrawals made by the owner(s) from the business for personal use.
- Losses: Debits increase loss accounts, such as bad debt expense or losses on the sale of assets.
When recording a transaction, the double-entry system requires that every debit entry be accompanied by a corresponding credit entry, ensuring that the total debits equal the total credits. This principle helps maintain the accuracy and integrity of financial records and enables businesses to track their financial performance and position over time.
Example of debit
Let’s say Company ABC purchases office supplies worth £500. When recording this transaction in the accounting records using double-entry bookkeeping, Company ABC would make the following entry:
- Debit: Office supplies expense £500
- Credit: Cash or accounts payable -£500
In this example, the debit entry of £500 increases the office supplies expense account, reflecting the company’s expenditure on office supplies. The corresponding credit entry of £500 decreases either the cash account or the accounts payable account.