Why are Debit and Credit Present in Journal Entries?
The entire world of financial accounting runs on the golden rules of debit and credit. An accountant has a proper understanding of these financial recordings and thus he must use them while reporting to maintain the accuracy of the business’ statements.
Every financial statement measures the monetary transactions made by the company for his business operations. They have existed in any recording of transactions to simplify the entire accounting process.
The debiting and crediting columns serve in ensuring apt recordings of financial transactions. In ledger, the debit column is on the left side while the credit column is on the right side. Debit transactions are those which increase the asset or is the expense account. It reduces the liabilities. Meanwhile, credit is the entry that increases the liability or equity account. It decreases the expense and assets of the company.
For any transaction, these two entries must be equal in order to have a balance in accounting. Hence, they are of great importance in the accounting world in order to keep control and maintain accuracy.
Now that you have clearly understood the left and right side of the financial record, let us understand their golden rules. There are 3 vital rules which you must know:
First Rule: Debit what comes in, credit what goes out
Second Rule: Debit all the expenses and losses, credit all the incomes and gains
Third Rule: Debit, The receiver, Credit the giver
The entries made against these accounts will affect the elements of accounting:
- Asset Account: Debit entry increases the balance and credit decreases the same
- Liability Account: Debit entry decreases the balance and credit increases the balance.
- Equity Account: Debit entry decreases the balance and credit increases the balance.
- Revenue Account: Debit entry decreases the balance and credit increases the balance.
Let us understand with some examples:
Your company purchased an inventory through cash:
Inventory A/c – Debit (Dr.) – Debit what comes in
To Cash A/c – Credit (Cr.)- Credit what goes out
Pay Office Rent:
Rent Paid to Mr. John – Dr. – Debit, the receiver
To Cheque A/c – Cr – Credit, the giver
All the transactions must be recorded in the journal entries which later shall be summarized into the ledgers. The journal entries depend on the three golden rules of debit and credit. If the journal entries are made clearly then the balance can be easily recordable. Without understanding its rules, one cannot be successful in making the journal entries. These fundamentals are like the basic alphabets of the English language which you must clearly and deeply master. The perfection of application of these rules come with practice.