Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Debit

What it is:

A debit is an accounting record that represents either an increase in assets or a decrease in liabilities or net worth. A debit is the opposite of a credit.

How it works (Example):

For example, let's say that Company XYZ sells $1,000,000 worth of widgets to John Doe for cash. On the balance sheet, the accountants would debit cash by $1,000,000 (that is, increase cash) and credit inventory by $1,000,000.

Why it Matters:

In accounting terms, "debit" and "credit" confuse most people, and it is usually clearer (and safer) to indicate which accounts increase or decrease. However, any financial professional should know the terms.

Debits and credits reflect the double-entry bookkeeping method. This involves making at least two recording entries for every transaction: a debit in one account and a credit in another account. The method helps prevent errors because the sum of the debits should equal the sum of the credits.