Heyrebate –

Debits and credits are the backbone of accounting. Though most people think that they understand these two terms, it can be more confusing than you think. For example, when you deposit money at the bank, the teller may say, “I’ll credit your account.” But credit is also the term used with that card you use at the grocery store with the little Visa symbol on it, and they’re certainly not “crediting” your account! In fact, quite the opposite: you are “crediting” their account each time you use the card.

So what are debits and credits? The answer depends on what type of account you are talking about. The following chart may help to clear up this confusion:

Account type Debits Credits
Assets Increase Decrease
Liabilities Decrease Increase
Income Decrease Increase
Expense Increase Decrease

Let’s say you want to purchase a new computer for your company using the company credit card. You will debit, or increase, the asset account for the company in the amount of the value of the computer (say, $600). You will also credit, or increase, the liability account for the amount of the computer. This method of entering each transaction twice is known as “double-entry accounting,” and it is one way of keeping track of where the money is going, and where it’s coming from.

The four types of accounts listed in the chart above are the most common types of accounts, and would all be included in something called a “balance sheet” that accountants use to give a “snapshot” of a company’s financial state at a specific point in time. An asset account will list everything that a company owns, and even some things it doesn’t, like delivery of goods or services for which the company hasn’t been paid yet. Liabilities are the amounts owed to others as of the date on the balance sheet, while income is actually considered as part of an “income statement” that includes both revenues and expenses.

Debits and credits are the two parts of every transaction, from buying milk at the grocery store to hedging funds in the stock market. Another way to look at it is to ask two questions: (1) What did you get?, and (2) Where did it come from? A debit is what you received, say the computer in the above example. The credit is where it came from, in this case the credit card liability account. Double-entry accounting has been used for over 500 years for simply that reason: it helps you determine quickly and efficiently when there is a problem with your money.

So, why is it that the bank tells you they will “credit” your account when you deposit money? Those tricky bankers have figured out a way to make you think that “crediting” is a good thing—by telling you what they’re doing to their own liability account! Never mind that they also debit your assets at the same time they credit their liabilities account, they explain it to you this way so that later on, you’ll open up a “credit” card with them—and they can charge you interest on your own money.
Pure accounting genius!

David Turner blogs about finding the best forensic accounting degree program to fit your educational and career goals.