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Debit (Accounting) Definition
In bookkeeping, a debit is a record in an account ledger that reflects reduction in profit of a company and increase in assets and decline in liabilities. It is an accounting entry reflected on the left side of the account ledger, it is a concept found in the double-entry accounting and the direct opposite of credit. Debit is often abbreviated as ‘dr’.
A Little More on What is a Debit in Accounting
When making entries in a standard journal, debits are recorded on the top lines while credits are recorded beneath them, a debit is a key component of a double-entry accounting system. In order to ensure the balance and accuracies of all entries in an accounting ledger, debits and credits are important. Both credits and debits are recorded in their dollar amounts and the total value of debits must amount to the total dollar value of all credits in a company’s accounting ledger.
In finance and accounting, there are some accounts that are required to have natural balances, otherwise called normal balances. This balances can either be credit or debit or both. The normal balance on the account is dependent on the debit and credit reflected in the account as well as the account equation. Both assets and expenses have normal debit balances, that is, the value of assets that are positive are debited while the negative values are credited.
Equity accounts, liabilities and revenues, on the other hand, have natural or normal credit balances and not debit balances. If they were to have debit accounts, the account balance will experience a decrease.
A debit note refers to a commercial document evidencing that a buyer has current debt obligations with a supplier or a vendor. It is also used (sent) by a buyer to a seller when returning goods that were purchased on credit, it the seller needs a proof of the amount, a debit note is issued by the buyer reflecting the business transaction. Debit notes are commonly used in B2B arrangements to depict a debit entry when a business is transacting with another business.
Debit notes as commercial documents can be likened to invoices. They serve proof of debt obligations or reminder for funds in a transaction. Returns on already made transactions and amendments to transactions are also reflected in debit notes.
Example of a Debit
Here is an example of how a debit is recorded in a company’s balance sheet;
If Company X makes sales on their latest fabric that has the total amount of $55, 000. The accounting ledger of the company must depict that it has $55,000 in cash and $55,000 short of fabric. Hence, the following adjusted will be made in the balance sheet, the cash account would be debited the worth of fabrics sold while the inventory account will be credited the same amount of $55,000.
Special Considerations: Contra Accounts
In an account ledger, a contra account is a type of account that reduces the value of a related account and is displayed opposite the normal balance. In a debit entry, a contra account has a contradicting effect to the normal account. It is a special type of account that offsets the balance of the normal account to which it is paired. Hence, the natural balance of a contra account is directly opposite the paired or related account.
An investor that buys shares on margin often resort to borrowing additional money from a broker or a lender to purchase large number of shares. The broker or lender in turn records a debit amount in the account of the investor, this is a debit balance of the investor. The debit balance carries the amount the investor owes the brokerage firm, hence, the investor must deposit a sum of amount into his margin account to offset the debt. This debt settlement often takes place after the buying on margin or large purchase of shares has been settled.
Although, both debit cards and credit cards almost look the same, they have diverging functions. Debit cards allows banks or financial institutions deduct money spent from an individual checking account while credit cards enables individuals to borrow money which will be paid at a later date from banks. With a debit card, an individual can make purchase of any amount freely without going around with any physical cash.
However, there is a certain limit to which an individual can borrow from a card issuer using the credit card. Once the limit is reached, no items can be purchased or withdrawal made with the credit card.
Here are some essential things you should know about a debit;
- A debt is a common feature of double-entry accounting or bookkeeping systems.
- In a company’s balance sheet, an increase in assets or decline in liabilities is reflected as a debit.
- In double-entry accounts, debits must be counterbalanced with credits in the T-account.
- When making entries in a company’s balance sheet, negative values for assets and expenses are credited while positive values are debited.