Lesson 2 Discussion Forum Explain the difference between the

Lesson 2 Discussion Forum Explain the difference between the correct use of the terms debit and credit and the incorrect use of these terms.

Solution

Solution: Debit and credit are the two elements of double entry system in accounting. In other words, there are two sides of every account in accounting. One side is named as \"Debit\" & the other is named as \" Credit\".

The correct use of the terms debit and credit implies when those elements are used within the purview of accounting rules and principles. In general, if something is coming in the business and increasing the business value, then it is debited. On the contrary, if something is getting out of business, then it is credited as it is decreasing the business value.

Example: Machinery Worth $ 100000 is purchased.

Now, machinery is coming. I will increase the assets as well as the value of the business. On the contrary, cash is going out of business in the form of payment for machinery. Therefore, it is credited.

The incorrect use of the terms debit and credit implies when we are using these terms against the accounting rules and principles. Let us elaborate the above example.

Example: Machinery Worth $ 100000 is purchased.

Here, if the machinery is credited instead it should be debited and cash is debited instead of credited by the mistake, error of accounting principles, then it is the incorrect use of debit and credit.