The terms 'debit' and 'credit' can be confusing when learning accounting for the
first time but why is that? If you go to the bank and put money into your
account, the teller will say, "I am crediting your account with X amount of
dollars," on the other hand take money out of your account and the teller will
say, "I am debiting your account X amount of dollars." Plus with debit machines
everywhere and everyone carrying at least one credit card these two terms take
on a whole new meaning. The difference between credit cards and debit
cards is that with a credit card you end up owing someone money, and with
a debit card, money is being removed from your bank account each time you spend
money with the card.
Unfortunately, in the accounting world, what we think we understand about the
terms debit and credit, has to be unlearned quickly. Why is
that? That's because in accounting, the term debit is used to
describe a bank account and credit accounts are money owed -
the exact opposite of what we've been taught elsewhere.
In accounting terms, neither credits nor debits are 'bad', but they need to
equal each other in order to balance themselves out in the end. Every itemized
transaction, no matter if it's a deposit or a bill to be paid has both a debit
and credit posted in the accounting world. This rule of debits and credits is
what is called 'double-entry accounting'. - so when you go to the
bank, and the teller says, "I am crediting your account X amount of dollars,"
another part of this transaction is that she is debits an entry of a similar
amount in another place, their cash drawer. The same goes for when the teller
tells you, "I am debiting your account X amount of dollars," - the accounting
will show that a credit of the same amount is being made elsewhere at the same
time.
There is an easy way to figure out both debits and credits in accounting terms
and that is to figure out the following: what did you receive and where did it
come from. To more simply define these accounting terms, the
debit is what you received, and the credit is where you
received it from . So for demonstration sake, let's say you
bought a CD with cash you borrowed with a Payday
Loan. The CD is what you got, so it will be a debit in the accounting
world, and the credit will be applied to the liability you carry on your bank
account for the exact same amount.
The bank can easily confuse people learning about credits and debits in the
accounting sense of the words, especially when discussing liability. For
instance, when you put money in the bank, the bank's liability to you
increases, and since liabilities are credits, they are crediting your account
(again, using accounting terminology). And when the bank lowers their liability
to us (by us taking money out of the bank) the banks are debiting the liability
account, from an accounting perspective.
Basically it comes down to being able to figure out what you got and where
exactly it came from; if you can figure these out for every transaction, then
you've got the accounting terms of credit and debit down pat.
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