What are differences between creditors, debtors, crediting and debiting?
2. Debiting versus crediting
Debit is an entry on the left side of an account. Under the double entry bookkeeping system, debits increase assets and expense and decrease liabilities, equity, and income (revenues). Debiting is a verb that means making a debit entry.
Credit is an entry on the right side of an account. Under the double entry bookkeeping system, credits decrease assets and expense and increase liabilities, equity, and income (revenues). Crediting is a verb that means making a credit entry.
Which account is debited or credited?
When speaking of selling and buying debt securities (i.e. talking about debtors and creditors), the following accounts are affected:
From debtor prospective: Increase (debit) asset accounts (e.g. Cash, Land, Equipment, Unamortized Bond Issue Costs), increase (credit) liability accounts (e.g. Bonds Payable, Notes Payable, Interest Payable), record and adjust bonds payable contra accounts (e.g. Discount of Bonds Payable, Premium on Bonds Payable), and increase (debit) expense accounts (e.g. Interest Expense, Bond Issue Expense).
The journal entries made by the debtor depend on the following factors:
- Are bonds payable issued at par, at a discount, or at a premium?
- Are bond payable issued on interest date or between interest dates?
- Has the issuer incurred debt issuance costs?
From creditor prospective: Increase (debit) asset accounts (e.g. Interest Receivable, Held-to-maturity securities, Available-for-sale securities, Notes Receivable, Cash (received from a debtor)) and decrease (credit) asset accounts (e.g. Cash (paid to debtor), Land, Equipment), increase (credit) revenue accounts (e.g. Bond Interest Revenue).
If creditor purchases a debt security at a discount or a premium, the creditor amortizes that amount using the effective interest method: to amortize a discount and to amortize a premium, the creditor debits and credits the investment account, accordingly. Note, the investment account is an asset account, and therefore, a debit will increase the account, and credit will decrease it. Thus, the amortization of a discount increases the investment account, and the amortization of a premium decreases the investment account.
Also, the creditor records unrealized holding gain and losses on available-for-sale securities (i.e. debits unrealized loss or credits unrealized gain) and debits (decreases) or credits (increases) Securities Fair Value Adjustment account.
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