What is the difference between Debit and Credit?

Question

What is the difference between Debit and Credit AND purchase and sale? These terms are very confusing.

I have some example questions to understand it more easily.

If I run a shop and

1. a customer buy something from me, what is the debit and credit?
2. a customer buy something of worth 1000 but gives me 500 what is debit and credit
3. if I buy a product from supplier worth 1000 and pay equally what is credit and debit
4. if I buy a product from supplier worth 1000 and don't pay what is credit and debit

Answer 1

Lets say Debit is what you pay and Credit is what somebody else pays for you. A Debit card will charge your bank account directly. A Credit card will charge your bank account some time later. In both cases the shop owner has the money available directly. It's called Credit because somebody believes you will be able to pay your debt on time (or later with an interest).

As for purchase and sales. A customer buys = makes a purchase. A shopkeeper sells = makes a sale.

1. A customer purchases some goods and the shopkeeper makes a sale. Credit or Debit don't matter to the shopkeeper as he/she receives money.
2. The shopkeeper gives 500 Credit to the buyer (The shopkeeper should not do this because he/she is not a bank...).
3. When you buy 1.000 worth of goods, you make a purchase, and depending on 'how' you pay you have Debit or Credit. If you pay directly, it's Debit, if you pay later, it's Credit.
4. When you don't pay, you receive 1.000 Credit from your supplier (who shouldn't do that as he/she is not a bank...).

Note from a bar: I made an agreement with the bank. They don't sell beer, I don't give Credit.

Answer 2

From your question, I believe that you are looking for what these mean in accounting terms and not the difference between a debit and a credit card.

I'll deal with purchase and sale first as this is easier. They are the same thing seen from different points of view. If I sell something to you then I have made a sale and you have made a purchase. Every sale is a purchase and every purchase is a sale.

Debits and Credits are accounting terms and refer to double column accounting (the most common accounting system used). The way a set of accounts works is, accounts are set up under the following broad headings:

1. Assets (what you have)
2. Liabilities (what you owe)
3. Equity (what you own)
4. Income (or Revenue)
5. Cost of Goods Sold
6. Expenses

The first 3 appear on the Balance Sheet, so called because the accounts balance (Assets = Liabilities + Equity). This is always a "point-in-time" snapshot of the accounts (1 June 2015).

That last 3 appear on the Profit and Loss sheet, Profit (or loss) = Income - Cost of Goods Sold - Expenses. This is always an interval measure (1 July 2014 to 30 June 2015). Changes in these accounts flow through to the Equity part of the Balance Sheet.

When you enter a transaction the Debits always equal the Credits, they are simply applied to different accounts.

Debits increase Assets, Cost of Goods Sold and Expenses and decrease Liabilities, Equity and Income.

Credits do the reverse

For your examples:

1. a customer buy something from me, what is the debit and credit?

I will assume they pay $1,000 and the thing cost you $500

Your cash (asset) goes up by $1,000 (Debit), your inventory (asset) goes down by $500 (Credit), your Sales revenue (income) goes up by $500 (credit).

This gives you a profit of $500.

2. a customer buy something of worth 1000 but gives me 500 what is debit and credit

Your cash (asset) goes up by $500 (Debit), your debtors (asset) goes up by $500, your inventory (asset) goes down by $500 (Credit), your Sales revenue (income) goes up by $500 (credit).

This also gives you a profit of $500.

3. if I buy a product from supplier worth 1000 and pay equally what is credit and debit

I assume you mean pay cash:

Your cash (asset) goes down by $1000 (Credit), your inventory (asset) goes up by $1000 (Debit).

There is no profit or loss here - you have swapped one asset (cash) for another (inventory).

4. if I buy a product from supplier worth 1000 and don't pay what is credit and debit

Your creditors (liability) goes up by $1000 (Credit), your inventory (asset) goes up by $1000 (Debit).

There is no profit or loss here - you have gained an asset (inventory) but incurred a liability (creditors).

The reason for confusion is that most people only see Debits and Credits in one place - their bank statement. Your bank statement is a journal of one of the banks liability accounts - its their liability because they owe the money to you (even loan accounts adopt this convention). Credits happen when you give money to the bank, they credit your account (increase a liability) and debit their cash balance (increase an asset). Debits are when they give money to you, they debit your account (decrease a liability) and credit their cash balance (decrease an asset) . If at the end of the period, you have a credit balance then they owe money to you, a debit balance means you owe money to them.

If you were keeping a book of accounts then your record of the transactions would be a mirror image of the bank's because you would be looking at it from your point of view.

Answer 3

Debit is them taking the money, in your case electronically. Credit is somebody vouching for you and saying you will pay later.

They are alternate ways to pay for a product. As a merchant, if you take a credit card you are agreeing that a the issuer of the credit card is going to pay you right away. The issuer of the credit will worry about collecting the money from me.

There are a ton of details with regards to why you would use one over another, where the costs in each method are and who pays what for each. The main different is the source of the funds.