A debit entry is a recorded transfer of funds to a financial account. A common form of debit entry is when money is added to your bank account on payday.
What Is a Debit Entry?
A debit entry is typically made to a debit or checking account when you add or receive money. For example, suppose you receive a cash advance loan to cover the cost of a home repair. In that case, that debit entry increases the value of your account.
Receiving a debit entry in a financial account is not limited to the money you earn. If you make a purchase at a store with a credit or debit card and return the item, the money you spent is deposited electronically through direct deposit. That would be considered a debit entry as well.
Is a Debit Entry Positive or Negative?
A debit entry is typically considered a positive entry in a financial account. An influx of money to an account is usually a good thing. But one debit entry may not be enough to cover all of your debt or bills. The goal is for all of your debit entries to be more than all of your bills and expenses.
How a Debit Entry Is Used in Financial Ledgers
A ledger is a financial bookkeeping system used by companies to track debit and credit entries. A ledger is typically balanced once a day, after business hours. Traditionally, a paper ledger book was used to keep track of finances, but most modern businesses use accounting software to track data.
A debit entry is used in a ledger to record inbound transactions, while a Credit entry records expenses. A ledger is balanced by subtracting the total credit entries from the total debit entries. While a business may aim to obtain more debit entries, the true goal is equal debit and credit entries.
Using a Debit Entry in Financial Statements
A debit entry is essential for financial statements. Various companies use debit entries in financial statements to accurately calculate income increases and monitor financial success.
Take a look at the three main types of financial statements that use a debit entry:
- Balance Statements: A balance statement, also called a balance sheet, details the income and expenses made for a certain period. A debit entry is crucial in balancing the finances of a company.
- Income Statements: An income statement is used to detail how much a company earned over a specified period. Having a lot of debit entries is beneficial for the business and demonstrates success.
- Cash Flow Statements: Cash flow statements monitor a company’s cash management. A debit entry occurs when cash is deposited and signifies a profit.
Using a Debit Entry in Accounting
Accounting is the process of documenting and organizing a business’s financial transactions. A debit entry is used in accounting to measure the amount of cash earned.
In accounting, there are three main types of accounts that use debit entries:
- Asset Accounts: An asset account records physical and non-physical assets, such as trademarks. A debit entry in an asset account is positive because it increases wealth.
- Liability Accounts: A liability account tracks a company’s total debt accumulation. A debit entry in a liability account decreases the overall balance, which means the company owes less money.
- Equity Accounts: An equity account measures the financial ownership of a company. A debit entry decreases the balance, which is beneficial to a business.
How a Debit Entry Affects a Credit Score
A person’s credit score is an essential financial tool used by lenders. It represents your financial history and whether you pose a lending risk. A debit entry made to a credit account can affect your credit. So it’s important that you understand your credit score.
Having a high credit score range may present more financial opportunities to borrowers. Take a look at where your score falls on the credit scoring model:
- Bad Credit: 300-579
- Fair Credit: 580-669
- Good Credit: 670-739
- Very Good: 740-799
- Excellent Credit: 720-850
Having a credit score that is higher than 670 is ideal. Lenders may offer lower interest rates, higher loan amounts, and longer repayment terms to borrowers that have worked to improve their credit. This is why we always recommend learning more about how to raise your credit scores.
A FICO score consists of five categories: payment history, debt accumulation, length of credit history, credit inquiries, and credit mix. You make a debit entry when you apply for a credit card and pay monthly. A credit card payment could help boost a credit score because two valuable categories are affected.
A debit entry can decrease the debt to credit utilization ratio, which accounts for 30% of a credit score. The more available credit a person has, the better their finances look to lenders. When you use more than 30% of your credit limit, lenders may think you are financially risky. But having a debt to credit ratio of 30% or below indicates that you are financially responsible.
However, payment history accounts for 35% of a credit score–the most significant percentage. Payments made on time reflect positively on a credit score, while late payments can cause a score to dip. A straightforward way to ensure a debit entry is completed on time each month is to set up automatic payments.
References:
Investopedia Terms: Debit
Beginners’ Guide to Financial Statement
How are FICO Scores Calculated? | myFICO
Debits and Credits Definition — AccountingTools