Today, we will learn a few terms related to accounting and business.
What are the DR and CR?
In accounting and business, DR represents Debit and CR Credit. Debit means that money is taken out of the account. Credit means that you receive payment on your account.
DR and CR are the foundation of double-entry bookkeeping, where every transaction recorded in debit has an equal credit record and vice versa.
The concept of double-entry bookkeeping is the base of present-day accounting. It was introduced by Luca Pacioli, known as the ‘Father of Accounting.’ He stated that to avoid errors of principle, debit should be equal to Credit at the end of the day.
A ledger account or balance sheet has two sides. The asset side (DR) contains all current and fixed assets and investments. The liability side (CR) has all current or long-term liabilities and stockholder’s equity. If the company adds any asset, it becomes the DR, while a deduction becomes CR. The situation is the opposite in terms of liability. CR refers to the increase in any liability, while DR means a decrease.
What does CR mean on a bill?
When you receive an invoice or bill, such as a credit card bill, you will see transactions recorded as DR or CR, that is, debit or Credit. While DR refers to all the expenses or payments made, CR refers to the transactions that are income or gains on the card.
In a nominal account, where all the expenses and incomes are noted, CR denotes transactions with an inflow of funds. In a bill, transactions with a CR are the payments you make. If it appears on your credit card, it may be a refund for a payment made on your card or the balance from the overpayment of your previous month’s credit card bill.
What is DR stand for?
DR is an abbreviation of ‘debit’ derived from the word ‘Debitum,’ which means “what is due” in Latin. DR signifies the accounting function, which causes a decrease or increase depending upon the type of account: nominal, personal, or natural.
Why are Debits and Credits used in accounting?
Debits and Credits are two main accounting functions used to reflect the increase and decrease in a ledger or balance sheet, depending upon the type of account. As increases or decreases are insufficient to record a transaction, debit and Credit bring a much broader scope to accounting.
Accounting has three types of accounts: nominal, personal, and accurate. Each records different categories of transactions.
- Nominal accounts are accounts related to income, gains, expenses, or losses. The income and gains are credits, and costs and losses are debits.
- Personal accounts are related to individuals or associations, where the receiver is debited, and the payer is credited.
- Natural accounts are related to liabilities and assets, where debit means anything that comes into the business, while Credit means whatever goes out of the company.
These are known as the three golden rules of accounting. According to these rules, transactions are debited or credited in accounting. The primary function of debit and Credit is to reflect the increase or decrease of different accounts in the ledger. It helps keep the balance of all the transactions and avoid errors of principle.
What is the Difference Between Debit and Credit?
Debit represents losing money from your account, while Credit represents a transfer to your account. For example, if your account receives $100, you have a $100 credit; if you lose $75, you will have a $75 debit.
Debit and Credit form the two different sides of an account. Debit forms the left side of an account, while Credit forms the right side. In broader terms, you can say that the account that is the destination of a transaction is debited, whereas the source account is credited.
For example, the following are two transactions made by the firm XYZ.
- She deposited Cash in the Bank, $20,000.
- I purchased machinery worth $10,000 and made a payment through the Bank.
In the first transaction, the Bank is the destinatiBankand the Cash is the source. This will result in the Bank Account being debited and the Cash Account being credited. Rent is the destination in the second transaction, and the Bank is the source. Therefore, it will result in the Rent Account being debited and the Bank Account being credited.
This shows the difference between Debit and Credit and how they are used to record transactions. However, your debit side’s total must match your credit side’s.
Is the ATM Card Debit or Credit?
An ATM card is a broader term than a debit or credit card. It cannot be categorized as just one of the two. A financial institution or Bank can debit or credit a payment card. It is linked to a bank account and can be used to pay or withdraw Cash.
ATM stands for Automated Teller Machine, where you can use the ATM card to withdraw money from the account linked to it and make approved payments. ATM cards cannot be defined as debit or credit cards, as both can function as ATM cards.
ATM cards either have a machine-readable magnetic stripe or a chip. Neither has security information linking it to the user’s account. The financial institution records every transaction on the card that uses that card. It is a safe payment source, as payments are only made if the user approves, which is generally done through a unique PIN that the user must keep confidential to avoid misuse.
Can I Use a Debit Card as a Credit Card?
While debit and credit cards are used for similar purposes, such as making payments or withdrawing Cash, they differ. While the debit card is linked to an account with stored value, a credit card can be used to make credit payments. Therefore, one cannot substitute a debit card for a credit card.
Financial institutions issue both debit and credit cards. They can be used in similar places to make secure payments. A debit card requires a prepayment towards the card or a savings account linked to the card. It is issued to make payments convenient for the account holder, as they can directly make the payments from the source account anywhere and anytime.
When making payments, a credit card functions similarly to a debit card. However, it is like a service offered by a financial institution. A bank or other institution extends credit facilities through credit cards, where users do not have to make any prepayment. Credit cards come with a credit limit. To the issuer, users must pay back the amount used on the card. If the repayment is not made within the time the issuer states, it can result in interest payment.
Is Debit Card Safe Online?
Even with so many benefits associated with a debit card, it is not recommended or safe for online payments. People should avoid using their debit cards to make online payments, as information shared with the wrong person can make their entire savings account vulnerable to fraud. Instead, people should use credit cards, as these are faithful e-commerce companions.
Many people use debit cards over credit cards because they are convenient and do not generate interest or extra payment charges. Also, people spend within the limit of what they have and not by borrowing. This, and a few other reasons, make debit cards more popular than credit cards for online and offline payments.
However, debit cards can cause severe and irreversible damage when making online payments. Since it is linked to your savings account, you could lose all your hard-earned money if you make one wrong move. Some cybercriminals can steal your card details and wipe out your account.
Credit cards provide some protection due to the Truth in Lending Act. If the user reports that their card is stolen or lost before any unauthorized transaction is made, they are not liable to pay any debts.
How Do I Know if My Card is Debit or Credit?
It is effortless to tell if your card is a debit or credit card just by looking at it. It is generally written on the right side of a card, on either side.
All cards have debit or Credit written on the right side, either front or back. You can check the information on your card’s backside if you cannot find it. Make sure to check it if you are confused before MMakicard’smistake.
Do the terms debit and Credit signify an increase?
Debit and Credit can signify an increase in some instances, depending upon the type of account. Since a transaction has a balanced debit and credit side, it can mean that an increase in the debited account is an equal increase in the credited account.
The above statement becomes clear with an example. If you purchase an asset on a loan or by raising equity, you are an asset and a liability. Therefore, in this case, both debit and credit increase. However, such cases are few. Generally, if a debit refers to an increase in an account, its corresponding credit transaction will refer to a decrease in another account and vice versa.
After leaving Wells Fargo Bank in 2014, Daniel began a career as a finance consultant, advising companies and individuals on economic policy, labor relations, and financial management.
At Promtfinance.com, Daniel writes about personal finance topics, value estimation, budgeting strategies, retirement planning, and portfolio diversification.
Read more on Daniel Smith's biography page.
Contact Daniel: daniel@promtfinance.com