- January 10, 2018
- Posted by: Chowdhury Shahid Uz Zaman
- Category: Finance
Debit and credit are the basic concepts of accounting. By using these values, you can reveal the capabilities of business processes and their directions, and also limit them if necessary.
Active and passive accounts
In total there are 2 types of accounts – active and passive. The first group includes those that designate the company’s own placed funds, and to the second, additional borrowed loans. Accordingly, for active accounts, a debit is an arrival, and a loan is a flow, and for a passive one, on the contrary.
Increasing the values of the left side of accounting (that is, debiting) on active accounts means increasing the property rights or property of the company, whereas in passive accounts, an increase in the debit indicates a reduction in the institution’s own funds and application.
The loan is displayed on the right side of the account. If we talk about active accounts, the increase in the value of the loan will tell about the reduction in the value of the company’s property or the amount of own funds, while an increase in the indicators of passive accounts will indicate an increase in the company’s funds.
Debit and its indicators
It is necessary to understand that debit is not just an indicator, but a constantly changing value that can change at least every day. The concepts of the debit balance at a certain point in time and the debit turnover for a certain period are singled out.
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The debit balance represents the estimated value of the company’s assets at the moment, and the debit turnover is the total evaluation of all transactions for a certain period of time, which led to an increase in the evaluation of property rights or a decrease in the source of the formation of this property.
Debit turnover when referring to a passive account usually shows the proceeds and various debts of enterprises, so on such accounts, funds always go from debit to credit. When indicating the operation of active accounts, the increase in the debit turnover reflects an increase in the amount of the amounts recorded (in this case, the assets and costs of the enterprise are indicated in the accounts).
What is it for?
Continuous accounting allows real-time monitoring of the company’s activities, where the debit and credit of the enterprise in its way are one of the main indicators of profitability and payback. In fact, the words “debit and credit” simply replaced the outdated “expense and arrival” values, as they more accurately reflect the essence of modern financial relationships, so they should not be frightened.
Typically, the debit is written down the costs of taxes and wages, and to the credit, respectively – the calculation of wages and arrears to the state budget. At first it is rather difficult to understand, since it turns out that the expenses are reflected in the graphs of the asset balance, because theoretically the expenditure of funds is displayed in the passive, and the receipt of money is in the asset. Comprehension of this science sometimes takes a lot of time, as it is necessary to understand to which value particular spending will be applied.