What Is a Debit?
A debit is an accounting entry that results in either an increase in assets or a decrease in liabilities on a company's balance sheet. In fundamental accounting, debits are balanced by credits, which operate in the exact opposite direction. For instance, if a firm takes out a loan to purchase equipment, it would debit fixed assets and at the same time credit, a liabilities account, depending on the nature of the loan.
The abbreviation for debit is sometimes "dr," which is short for "debtor."
[Important: The concept of debits and offsetting credits are the cornerstone of double-entry accounting.]
How Debits Work
A debit is a feature found in all double-entry accounting systems. In a standard journal entry, all debits are placed as the top lines, while all credits are listed on the line below debits. When using T-accounts, a debit is the left side of the chart while a credit is the right side. Debits and credits are utilized in the trial balance and adjusted trial balance to ensure all entries balance. The total dollar amount of all debits must equal the total dollar amount of all credits. In other words, the finances must balance.
A dangling debit is a debit balance with no offsetting credit balance that would allow it to be written off. It occurs in financial accounting and reflects discrepancies in a company's balance sheet, and when a company purchases goodwill or services to create a debit.
Normal Accounting Balances
Certain types of accounts have natural balances in financial accounting systems. Assets and expenses have natural debit balances. This means positive values for assets and expenses are debited and negative balances are credited. For example, upon the receipt of $1,000 cash, the journal entry would include a debit of $1,000 to the cash account in the balance sheet, because cash is increasing. If another transaction involves payment of $500 in cash, the journal entry would have a credit to the cash account of $500 because cash is being reduced. In effect, a debit increases an expense account in the income statement, and a credit decreases it.
Liabilities, revenues, and equity accounts have natural credit balances. If a debit is applied to any of these accounts, the account balance has decreased. For example, a debit to the accounts payable account in the balance sheet indicates a reduction of a liability. The offsetting credit is most likely a credit to cash because the reduction of a liability means the debt is being paid and cash is an outflow. For the revenue accounts in the income statement, debit entries decrease the account, while a credit points to an increase to the account.
Debit notes are a form of proof that one business has created a legitimate debit entry in the course of dealing with another business (B2B). This might occur when a purchaser returns materials to a supplier and needs to validate the reimbursed amount. In this case, the purchaser issues a debit note reflecting the accounting transaction.
A business might issue a debit note in response to a received credit note. Mistakes (often interest charges and fees) in a sales, purchase or loan invoice might prompt a firm to issue a debit note to help correct the error. A debit note or debit receipt is very similar to an invoice. The main difference is that invoices always show a sale, where debit notes and debit receipts reflect adjustments or returns on transactions that have already taken place.
- A debit is an accounting entry that results in either an increase in assets or a decrease in liabilities on a company's balance sheet.
- In double-entry bookkeeping, all debits must be offset with corresponding credits in their T-accounts.
- On a balance sheet, positive values for assets and expenses are debited and negative balances are credited.
Example of a Debit
As a quick example, if Barnes & Noble sold $20,000 worth of books, it would debit its cash account $20,000 and credit its books or inventory account $20,000. This double-entry system shows that the company now has $20,000 more in cash and a corresponding $20,000 less in books.
Special Considerations: Contra Accounts
Certain accounts are used for valuation purposes and are displayed on the financial statements opposite the normal balances. These accounts are called contra accounts. The debit entry to a contra account has the opposite effect as it would to a normal account. For example, an allowance for uncollectable accounts offsets the asset accounts receivable. Because the allowance is a negative asset, a debit actually decreases the allowance. A contra asset's debit is the opposite of a normal account's debit, which increases the asset.
Special Considerations: Margin Debit
When buying on margin, investors borrow funds from their brokerage and then combine those funds with their own to purchase a greater number of shares than they would have been able to purchase with their own funds. The debit amount recorded by the brokerage in an investor's account represents the cash cost of the transaction to the investor.
The debt balance, in a margin account, is the amount of money owed by the customer to the broker (or another lender) for funds advanced to purchase securities. The debit balance is the amount of funds the customer must put into his or her margin account, following the successful execution of a security purchase order, in order to properly settle the transaction.
The debit balance can be contrasted with the credit balance. While a long margin position has a debit balance, a margin account with only short positions will show a credit balance. The credit balance is the sum of the proceeds from a short sale and the required margin amount under Regulation T.
Sometimes, a trader's margin account has both long and short margin positions. Adjusted debit balance is the amount in a margin account that is owed to the brokerage firm, minus profits on short sales and balances in a special miscellaneous account (SMA).
Debit Cards Versus Credit Cards
Credit cards and debit cards typically look almost identical, with 16-digit card numbers, expiration dates, and personal identification number (PIN) codes. But that is where the similarity ends. Debit cards allow bank customers to spend money by drawing on existing funds they have already deposited at the bank, such as from a checking account.
Credit cards allow consumers to borrow money from the card issuer up to a certain limit in order to purchase items or withdraw cash. Debit cards offer the convenience of credit cards and many of the same consumer protections when issued by major payment processors like Visa or MasterCard.
[Fast Fact: The first debit card may have hit the market as early as 1966, when the Bank of Delaware piloted the idea.]