a) Credit
Definition:In accounting, the term credit refers to the right-hand side of an
account in the double-entry system. When a transaction results in a decrease in
assets or an increase in liabilities, income, or owner’s equity, the amount is
recorded on the credit side.
Explanation:Credit represents a source of funds. For example, when a business earns
income, its capital increases, and thus the transaction is recorded on the credit
side. Similarly, if a loan is taken, the liability of the business increases, so it
is credited.
Examples:
• Sales of goods (revenue increases)
• Capital introduced by the owner (owner’s equity increases)
• Loan taken from a bank (liability increases)
Rule (Golden Rule for Credit):
• For Personal Account: Credit the giver
• For Real Account: Credit what goes out
• For Nominal Account: Credit all incomes and gains
b) Debit
Definition:Debit refers to the left-hand side of an account in the double-entry
bookkeeping system. It is used to record an increase in assets and expenses or a
decrease in liabilities and capital.
Explanation:Debit represents the use or application of funds. When the business
acquires assets or incurs an expense, the value is recorded on the debit side. It
reflects what the business receives or spends.
Examples:
• Purchase of machinery (asset increases)
• Payment of salary (expense increases)
• Cash withdrawn by the owner (capital decreases)
Rule (Golden Rule for Debit):
• For Personal Account: Debit the receiver
• For Real Account: Debit what comes in
• For Nominal Account: Debit all expenses and losses
c) Creditor
Definition:A creditor is a person, firm, or institution to whom the business owes
money. This situation usually arises when the business purchases goods or services
on credit. Creditors are liabilities for the business and are shown on the
liabilities side of the balance sheet.
Explanation:When goods are purchased on credit, the seller does not receive payment
immediately. Instead, the buyer becomes liable to pay the amount in the future. The
seller, in this case, is referred to as a creditor. The business must settle its
dues with the creditor within the agreed credit period.
Example:If ABC Traders purchases goods worth ₹50,000 from M/s Ram & Sons on credit,
then M/s Ram & Sons is the creditor of ABC Traders.
d) Debtor
Definition:A debtor is a person, firm, or institution who owes money to the
business. This usually occurs when the business sells goods or services on credit.
Debtors are considered assets and are shown on the assets side of the balance sheet
under current assets.
Explanation:When goods are sold on credit, the payment is not received immediately.
The buyer promises to pay the amount at a later date. This buyer is known as the
debtor. The business expects to receive the amount from the debtor within the
credit period.
Example:If XYZ Enterprises sells goods worth ₹40,000 to Mr. Ramesh on credit, then
Mr. Ramesh is a debtor of XYZ Enterprises.