Now which one is it... Debit or Credit?
Contrary to popular belief and even some dictionary definitions, accounting debits and credits do not mean decrease and increase. The only constant definition of debits and credits is that debits are left-column entries and credits are right-column entries.
In fact, debits and credits each increase certain types of accounts and decrease others. In asset and expense type accounts, debits increase the balance and credits decrease the balance. In liability, equity and income type accounts, credits increase the balance and debits decrease the balance. Not confused yet, well read on?
For example, debits increase your bank account balance and credits decrease your bank account balance. Wait a minute, you might say, a debit card decreases the balance in my checking account, because I take money out of it. And when the bank gives me money back on something, they credit my account. So why is this reversed in accounting?
Banks report transactions from their perspective, not yours. Their perspective is exactly opposite to yours. To you, your bank account represents an asset, something you own. To the bank, your bank account represents a loan, or liability, because they owe you that money. Asset and liability accounts are exact opposites in the way they behave. In a liability account, debits decrease the balance and credits increase the balance.
When you take money out of your bank account, the balance in your account decreases. To you, this is a decrease in an asset, so you credit your bank account. To the bank, this is a decrease in a liability, so they debit your bank account.
It’s really quite straight forward…aaaagh!
Tags: accounting, credit, debit