Debt Vs Deficit

Introduction

Debt and Deficit are commonly used terms in finance as well as in politics; both terms affect the general public in many prescribed ways; general public and even many financially educated people use both these words interchangeably, but the fact is, debt and deficit are completely different from each other if analysed with an intellectual eye.

People often confuse these terms on the basis of situations and often use them as synonyms for each other, but in reality, they both are related to each other. These two terms are most used during policy and law-making; the deficit is the difference between government income and expenditure; on the other hand, debt is the amount borrowed for different purposes. 

People acquire debt for different things, and even debt is part of our daily lives nowadays; credit cards, Bank loans, and mortgages are examples of debt. While deficit can be termed as a loss if described in simple terms - an excess of expenditure/liabilities over income/assets in a given period of time. In this article, we’ll discuss the difference between Debt Vs Deficit, So stay tuned!

What is a Deficit?

In simple terms, the opposite of a surplus is a deficit, which is calculated as the difference between total revenue collection and total spending; if a government collects more revenue than the spending, then it adds on as a surplus, whereas if spending exceeds earning, it will result in a deficit, Similar concept applies to business entities.  

Deficits don’t only happen because of recession; deficit access to more debts in order to bridge the gap between the money required and money in hand. Corporations and governments increase their deficit by spending more; having more deficit eats out the surplus balance.

Relation between Debt and Deficit 

The term debt is the broadly used term used in Individual, personal, Business and government communication. In contrast, the deficit term is only used in government propagation, policy and law-making frameworks.

Debt is the amount borrowed throughout the year and is denoted in the balance sheet at the end of the year; when debt increases and exceeds all the available assets, then the business runs a deficit, and when a business runs a surplus or makes good revenue, then debt diminishes.

Both debt and deficit are often a result of each other; in case a business is suffering from a deficit, then it will eventually lend money from a financial institution or any other big company, which itself is nothing but debt. Hence it is not wrong to say that deficit creates debt or debt arises because of a deficit. 

Debt Vs Deficit - Contrast 

Now, let's see the difference between both debt and deficit.

Deficit

• No principal amount and Interest payment involved to parties. 
• This applies to a whole-year account and does not go on multiple bases. 
• It’s a finance/economics term and also a reason behind taking off debt. 
• The deficit remains constant over the year - it's the behaviour through which the government spends money. 
• The deficit is independent of debt; if an entity borrows, then the deficit will be at an all-time high.  
• The deficit is wholly an internal obligation that happens within the company.

Debt

• Debt has to be returned within the pre-decided time period, along with the rate of interest decided. 
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• Debt is referred to as every single amount borrowed at every time during the financial year. 
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• Debt can be borrowed from different sources, both internally and externally. 
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• Debt can never be constant. It keeps on changing throughout the year as the interest rate keeps on adding to the principal amount.   
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• Debt results from a deficit; if there is a deficit in an entity’s budget, it will borrow debt.
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• In Debt, an external party is involved with an obligation to repay the amount borrowed. 

Does Debt End Deficit?

Whenever a corporation or government faces a situation of deficit or is out of funds, the easiest option to get out of debt they see is taking off more debt, but this time making the right use of the borrowed amount and focusing on generating a surplus. 

Taking more and more debts will never take one out of the deficit situation; only surplus can take one out of the deficit; more debt acts as a source through which one can make more revenue and end the affair of deficit.  

Not repaying debt on time disrupts the creditworthiness of the borrower and also makes a negative impact on the credit score of one; if a debt is not repaid, it gets extremely difficult to take more debt. 

Conclusion 

In the long run, both debt and deficit damage the entities as well as the economy; a constant deficit will never let the entity/economy grow; debt creates more debt; it will be better if you avoid it as much as possible if taking it do repay it within time. Those firms who operate in a deficit have very little money in hand to invest in further expansion, and their competitors leave them behind. If you are an entrepreneur, be very less dependent on debt and avoid being in deficit. 

Debt Vs Deficit: Frequently Asked Questions

Q.1 Is deficit another word for debt?

No debt and deficit are not the same; both have different meanings and purposes. 

Q.2 Is India in debt?

India has a total debt of INR 155.8 lakh crore as per central government statistics. 

Q.3 Who gave debt to India?  

India’s major creditors are IDA, ADB and IBRD.

Q.4 What is the concept of deficit?

The amount which gets short at the time of payment is a deficit; in simple terms, if the required amount exceeds the available amount, then the situation of deficit arises.