In layman`s term, credit in the books of account is something that is owed or payable by the owner of the account, and debit in the same books is something that is received or receivable by the owner of the account. But accounts such as sales, return outwards, share capital / owner`s capital, other liabilities, and the likes appear as credit. Obviously this is confusing.
To under this concept, we first need to dissociate the person`s identity from the identity of the business, organization, institution, etc., whose accounts are being prepared. And we also need to consider every transaction in monetary terms. If the person starts a business with some cash, the business or the owner of the account owes him that money. Therefore, the amount owed to the person/investor is shown in credit in the accounts of the business, and the cash account is debited correspondingly. The person may invest in the business in form of cash, or surrender a vehicle for use in business. Even then, the business owes him an amount that could be identified as the value of that vehicle as of that date. Now, business obviously received the vehicle, so vehicle account is debited, and the debt to the individual is acknowledged with equivalent credit. This is the fundamental double entry system that is universally accepted for accounting purposes. Keeping in view this concept, it now becomes easy to understand why sales appear as credit in the books of account. Cash is received on sale of a good, and correspondingly an account has to be credited to complete the double entry. The title of this account has to reflect the transaction so that it can be easily understood at the later date as well; so sales becomes the appropriate head of account. Even if the sale is on credit, it is the debtor who owes the business something, so the debtor`s account is debited with the amount, and sales account is credited with the amount.
There is difference between capital expenditures and revenue expenditures. Revenue expenditures are those that are wiped out clean at the end of the year like the blackboard at the end of the day. Capital expenditures on the other hand continue to have balances at the end of the year, which is taken forward to the next year like the notebooks. Capital expenditure is not to be confused with capital account. Capital account is a liability; it is something the business owes to the investor or the owner of the business. Therefore, the balance in this liability is a credit balance. Capital expenditure is not an account head per se. Therefore, cost of purchase of machinery, building of factories, cost of any approvals, etc., will all be classified as capital expenditures. These expenditures result in creation of asset as something comes into the business, be it machinery, or approval, which can be sold for cash. These are therefore debit accounts. In general, account heads towards the liabilities side of the balance sheet are credit accounts, and the account heads towards the assets side of the balance sheet are debit accounts. Similarly, account heads towards expenses side in the manufacturing, profit and loss, and appropriation accounts are debit accounts, while account heads towards the revenue side of these accounts are credit accounts. If the owner of the business withdraws part or whole of the funds invested by him, and the business is still continuing as an entity, then the amount is shown as drawing on the asset side of the balance sheet, and not as clearing of his debt. This is because the business has to continue as somebody`s property. Profits earned are also periodically added to the amount owed to the owner of the business. These cover any such drawings or dividends.
Business enterprises take loans for their activities from lenders such as the banks. This credit line is given through letter of credit and is reflected in the liabilities side of the balance sheet of the business. Notwithstanding the entitlement, only the amount that has been availed as of any date out of the total limits sanctioned to the business are recorded in the books of account in the credit. Tax credits are actually credits that can be set off against the tax payable by the business. A comparatively new concept is that of carbon credit. This is related to carbon emissions. If the business is able to control the carbon emissions, it is entitled to these credits.