Debit refers to the left side of an account. Each account has two sides: a debit side and a credit side. To debit means to record an amount on the left side of the account.
Origin of the Term "Debit"
The term "debit" is believed to have originated from the Latin word "debitum" which means "what is due". "Debere", a derivative of debitum, is believed to be the origin of its abbreviation "Dr".
Left Side of an Account
Each account has a debit and a credit side. Debit refers to the left while credit refers to the right. To debit an account means to record an amount to the left side of that account.
When to Debit an Account
Debit is often associated with the "value received" by the entity. For example, if the company received cash, the cash account is debited. If the company acquired an equipment, the equipment account is debited. When the company received services from a utility company, utilities expense is debited.
Assets are debited when received and expenses are debited when incurred. Liabilities, capital, and revenues are recorded by crediting them. Hence to decrease them, they are debited.
In summary debit is used to:
- Increase an asset (Cash, Receivables, Inventories, Fixed Assets,..)
- Decrease a liability (Accounts Payable, Notes Payable, Loans Payable,..)
- Decrease capital (Owner's Capital, Capital Stock, Retained Earnings,..)
- Decrease a revenue (Sales, Interest Income, Gain on Sale of Equipment,..)
- Increase an expense (Salary Expense, Rent Expense, Utilities Expense,..)
- Increase drawings (for sole proprietorships and partneships)
Contra accounts are those that are shown as deduction from their related accounts. Debiting them would do the opposite of what it would do to the related account. Debits are also used to:
- Decrease a contra-asset (Allowance for Bad Debts, Accumulated Depreciation,..)
- Increase a contra-liability (Discount on Loans Payable,..)
- Increase a contra-revenue (Sales Discounts, Sales Returns and Allowances,..)
- Decrease a contra-expense (though rarely used, e.g., portion of expense reimbursable)
Note: To do the opposite of any of the above, the account is credited. For example, to decrease an asset, it is credited.
1. ABC Company received $100,000 cash and a delivery van with a value of $30,000 from its owner to be used by the business. The entry would include a debit to Cash for $100,000 since there is an increase in the company's cash (which is an asset). The entry would also include a debit to Delivery Equipment for $30,000 because the company received the asset. The capital account is credited.
2. The company incurred in $90,000 salaries expense, $20,000 utilities, and $10,000 rent. The entries would include debits to the expense accounts: Salary Expense, Utilities Expense, and Rent Expense for $90,000, $20,000 and $10,000, respectively. Expenses are increased or recorded by debiting them.
3. The company paid $40,000 of its accounts payable. Accounts Payable is a liability account. It was initially recorded by crediting the account. When the company paid a portion of it, the balance should be decreased. To record the decrease in accounts payable, it is debited for $40,000; and the cash account is credited.