What is the Difference Between Credits and Debits
When you deposit money in the bank, the cashier will tell you "I'll credit your account." You might assume that cash is a credit, and so credits are good. That view is further strengthened when reductions in the accounts are referred to as debits. Besides, if you remove the "i" from debit, you get the word "debt." So, you think, debits are bad.
Unfortunately, this conditioning that we receive at the bank causes real confusion in the accounting class. Why? Because in accounting we understand that our bank account is a debit account, and that debts are credit accounts - just the opposite of what most people would expect.
In fact, debits and credits are neither good nor bad. Each transaction that is made, whether it be a good transaction (deposits), or a bad transaction (bills) has both a debit and an equal credit. That's why it is called "double-entry accounting." When the cashier tells you he or she will "credit your account", they are also entering a debit for the same amount that they do not tell you about. The same thing is true for the debits to your bank account - there is also a credit being generated at the same time.
I find the best way to understand debits and credits is to identify two components of each transaction: 1) what did you receive; and, 2) where did it come from. The debit is what you received, and the credit is the source of the item or service you received. For instance, imagine that you purchased a computer with your credit card. Since the computer is what you got, it's going to result in a debit to the asset account for your computer. The credit will be applied to the credit card liability account for the same amount also as a result of this purchase.
The banks can confuse us because they are telling us the entry to their liability account. When you deposit money into your bank account, their liability to you increases. Since liabilities are credit accounts, they are crediting our account. When they reduce their liability they have to us, they are debiting their liability account.
Iif you can identify what you received and where it came from in every transaction you will have the concept of debits and credits mastered.
Accounting Made Easy, Module I of the Professional Bookkeeper™ Program, explains the Difference Between Credits and Debits in detail.
Click HERE to see what else is taught in Module I.
