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, who is known as the ‘Father of Accounting’. He stated that to avoid errors of principle, your debit should be equal to credit at the end of the day.
There are two sides to a ledger account or a balance sheet. The asset side (DR) contains all the current and fixed assets and investments. The liability side (CR) has all the current or long-term liability and the stockholder’s equity. If there is any addition to any form of asset of the company, 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, for example, a credit card bill, you will see transactions recorded as DR or CR, that is, debit or credit. While the 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 it could be the balance from the overpayment of your previous month’s credit card bill.
What is DR stand for?
DR is an abbreviation of the word ‘debit’ derived from the word ‘Debitum,’ which means “what is due” in Latin. DR signifies the accounting function, where it causes a decrease or increase, depending upon the type of account; nominal, personal or real.
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 not enough to record a transaction, debit and credit bring a much broader scope to accounting.
There are three types of accounts in accounting: nominal, personal, and real. Each of these accounts records different categories of transactions.
- Nominal accounts are accounts related to income, gains, expenses, or losses. The income and gains are credits, and expenses and losses are debits.
- Personal accounts are related to individuals or associations, where the receiver is debited, and the payer is credited.
- Real accounts are related to liabilities and assets, where debit means anything that comes into the business, while credit means whatever goes out of the business.
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 the process of 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, and 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.
- Deposited Cash in Bank, $20,000.
- Purchased machinery worth $10,000 and made payment through the bank.
In the first transaction, Bank is the destination, and the Cash is the source. This will result in Bank Account being debited and Cash Account being credited. Rent is the destination in the second transaction, and Bank is the source. Therefore, it will result in Rent Account being debited and Bank Account being credited.
This shows the difference between Debit and Credit and how they are used to record transactions. However, the total of your debit side must match the total of your credit side.
Is ATM Card Debit or Credit?
An ATM card is a broader term than a debit card or credit card. It cannot be categorized as just one of the two. It is a payment card that can be both debit or credit issued by a financial institution or a bank. It is linked to your account and can be used to make a payment 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. It can also be used to make approved payments. These cannot be defined as either debit cards or credit cards, as both cards can function as ATM cards.
ATM cards either have a machine-readable magnetic stripe or a chip. Either of them has security information stored in them that links it to the user’s account. Every transaction made on such a card is recorded by the financial institution that issued 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 both debit and credit cards are used for a similar purpose, to make payments or withdraw cash, both of them are different. 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 cards and credit cards. They can be used in similar places to make a secure payment. A debit requires a prepayment towards the card or a savings account link 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 it comes to making payments, a credit card functions similar 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 have to pay back the amount used up on the card. If the repayment is not made within the time stated by the issuer, 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 and safe to use for online payments. People should avoid using their debit cards for making online payments as information shared with the wrong person can make your entire savings account vulnerable to fraud. Instead, people should use credit cards as these are true e-commerce companions.
Many people would prefer debit cards over credit cards because it is convenient and does not generate interest or extra charges for making payments. 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, when making online payments, debit cards can cause severe and irreversible damage. Since it is linked to your savings account, one wrong move and you could lose all your hard-earned money. Some cyber criminals can steal your card details and wipe out your account.
Due to the Truth in Lending Act, credit cards provide protection to some extent. If the user reports that their card is stolen or lost before any unauthorized transaction is made from it, they are not liable to pay any debts after that.
How Do I Know if My Card is Debit or Credit?
It is effortless to tell if your card is a debit or credit 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 card’s right side, either front or back. If you cannot find it, you can check the information written on the backside of your card. Make sure to check it if you are confused before making any mistake.
Do the terms debit and credit signify 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 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