What does debit mean: a simple guide

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.

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?

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”. 

What is important is to note that for every debit entry, there should be an equal and opposite credit entry. The reason is that there needs to be a net balance in terms of each of your entries for the books to balance.

What types of accounts use debit?

Now that you know what debit is in fundamental accounting, it’s time to look at what types of accounts use it. 

Naturally, in accounting, different types of accounts utilise such entries to record transactions. These include asset accounts, expense accounts, dividend accounts, and loss accounts.

• Asset accounts portray business resources that are owned by the company. These can include cash, inventory, equipment, and others. Adding debit to an asset account means that its value has increased. In short, debit increases the balance.

• Expense accounts track business costs that accumulate during the process of generating revenue. Popular examples are rent, salaries, and utilities. Debiting this account indicates an increase in the expenses, which ultimately lowers the net income of the company.

• Dividend accounts monitor the business’s earnings distribution to shareholders. Debiting the dividends paid account signals that the business has distributed funds to its owners.

• In terms of loss accounts, when a company sells some of its assets without making any profit but actually recording a loss, this loss is debited.

• A liability account demonstrates the liabilities or debts a company owes, in most cases representing things like loans or accounts payable. Liability accounts are lowered by debits.

Overall, debits are used to increase the balance of the bank account or checking account types explored above, while they decrease the balance of liability accounts. If you deposit funds into a checking account, it’s debited, boosting cash assets. At the same time, if the company repays a loan, the loan payable account is debited, leading to a drop in liabilities. 

Normal accounting balances

When discussing debit, it’s important to understand what normal accounting balances mean.

In some cases, accounts contain natural balances in accounting. For example, assets and expenses are considered to have natural debit balances, meaning that assets and expenses with positive values are debited, while those with negative balances are credited. 

The components that stand out with natural credit balances are liabilities, revenues, and equity accounts. 

Debit notes

But how can businesses keep track of the debits when dealing with other companies? Enter the debit note or debit receipt – a proof element of a legitimate debit entry. 

In most cases, this happens when a buyer returns goods to a seller and must validate the reimbursed amount. To make this possible, the buyer issues a debit note demonstrating the transaction.

On the other hand, some companies rely on a debit note as a result of receiving credit notes. For example, human error can sometimes lead to mistakes like fees or interest charges on sales, purchases, or loan invoices, requiring corrections, which can be made via a debit note. 

Margin Debit

Investors often rely on borrowing from a brokerage to accumulate enough funds to invest in larger share volumes. The cash cost that the brokerage generates as part of the transaction to the investor is demonstrated in the debit amount recorded in the investor’s account. 

In a margin account, the debit balance represents how much money the investor owes the broker. In other words, the debit balance is the amount of money the investor is obliged to add to their margin account, after making a security order. 

Long margin positions are characterised with a debit balance, margin accounts with short positions will only have a credit balance. 

Contra accounts

At the same time, other types of accounts (known as contra accounts) are utilised for valuation purposes. They’re usually shown on the financial statements across the normal balances. 

The easiest way to understand contra accounts is to keep in mind that debit entries have the exact opposite effect they would traditionally have on a normal account.

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. It can be found in any double-entry system. But let’s look at what credit represents and how it differs from debit.

Generally, credit is the opposite of debit. It means a decrease in assets and an increase in liabilities. 

When working with a standard journal entry, debit entries are positioned at the top, while credits are located below the debits. In a T-account system, debits are on the left while credits are on the right. Both are used in a trial balance where all entries in the accounting system must balance.

In case there are discrepancies in the balance sheet, a “dangling debit” appears. This term represents a debit balance with zero offsetting credit balance that can enable it to be written off. 

Higher credits don’t signal a strong or healthy balance sheet.

Conclusion

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.