Debit, credit, balance and other scary words
For a person far from the financial sector, accounting will always be something complicated and not very clear, but everyone knows the words “debit" and “credit”. Many people use these terms in everyday speech without even fully understanding what they really mean.
Therefore, it makes sense to formulate in a language understandable to a non-specialist what these two familiar words really mean.
Definition of debit and credit terms
For any business, the main task is to make a profit, therefore, for the normal functioning of any enterprise, it is vital to keep accurate records of all financial flows, analyzing it for a fixed period of time. Modern legislation obliges commercial enterprises to have transparent and auditable financial statements.
The net profit of the enterprise is the difference between the total income and expenses for the estimated period of time. For active accounts, a debit is an income to them, a credit is an expense. At the same time, it must be remembered that on a passive account, a credit is an income, and an expense is usually called a debit.
In short, a debit can be called any profit of an enterprise, and a credit is all the expenses necessary for the implementation of its activities. These terms were first used in the Treatise on Accounts and Records by a Franciscan monk and are still the basic concepts of modern accounting.
The literal translation of the word "debit" will be "I owe", and "credit" is translated from Latin as "I owe".
How to learn to understand accounting calculations
In modern accounting, it is customary to conduct a double fixation of the operations performed, as a result, the accounting calculation is a table consisting of two columns. On the right, it is customary to record income, and on the left, consumption.
Double entry is a convenient and easily verifiable method of accounting for expenses and receipts, in which any action related to the movement of enterprise funds should be displayed in both columns.
For clarity, let’s look at these concepts with a simple example:
Let a new raw material be obtained, which costs 10,000 conditional units.
After a transaction of this kind, the accountant will enter the information “60 settlements with suppliers” in the credit column, and “10 materials” in the debit column.
Thus, the debts to the supplier increased and at the same time the amount of raw materials in the warehouse increased – both of these events are adequately reflected in the accounting documents.
What is the difference between debit and credit
Business assets are all the property of an enterprise, including money in accounts, shares, financial liabilities, securities. An increase in credit always implies a decrease in assets. Accordingly, the debit, on the contrary, increases them. At the same time, it does not matter what exactly the profit is expressed in – it can be new equipment, money, shares or raw materials.
If the account is passive, then the loan shows an increase in the company’s debt. The debit, in this case, reflects a decrease in debt obligations. Passive accounts are maintained to record transactions related to the sources of formation of enterprise funds, such as employee salaries, various taxes, and much more.
Balance. What it is.
The main question facing the accountant is to calculate the actual profit of the enterprise. This is necessary both for the correct payment of taxes and for an accurate assessment of the profitability of the business. To do this, you need to calculate the difference between credit and debit.
This difference, taken over a fixed period of time, is called the balance.
If income exceeds expenses, it is displayed as a debit balance in an active account. Otherwise, at expenses greater than profit, this value will appear on the passive account in the form of a credit balance. This simple and logical method helps to evaluate the local state of the company’s accounts for a fixed period of time. This is very convenient for business development analysis. Obviously, with a debit greater than a credit, the enterprise is profitable.
To assess the profitability of an enterprise, it is customary to calculate this difference once a year and not to take intermediate values into account. Thus, in the language of the layman, these terms denoted income and expenditure, the parameters necessary for calculating real profit.