|
This article will help you understand an important distinction in accounting
and bookkeeping- the difference between a credit and debit.
 When you deposit money in the bank, the cashier will tell you "I'll
credit your account." From that experience, most people assume that cash
is a credit, and so credits are good. That is further reinforced when reductions
in the accounts are referred to as debits. Besides, if you remove the "i"
from debit, you get "debt." So, debits are bad.
Unfortunately, the conditioning we receive at the bank is causing real confusion
in the accounting class. Why? Because in accounting we understand that the
bank account is a debit account, and that debts are credit accounts - the
opposite of what most people expect.
In fact, debits and credits are neither good nor bad. Each transaction, whether
it be a good transaction (deposits), or a bad transaction (bills) has both
a debit and an equal credit. That's why they call it "double-entry accounting."
When the cashier is telling you he or she will "credit your account",
they are also entering a debit for the same amount that they are not telling
you about. The same is true for the debits to your account - there is also
a credit being made 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 get; and, 2) where did it come from.
The debit is what you got, and the credit is the source of the item you received.
For instance, let's imagine that you purchase a computer with your credit
card. Since the computer is what you received 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.
The banks tend to confuse us because they are telling us the entry to their
liability account. When you deposit money in the bank, their liability to
you increases. Since liabilities are credit accounts they are crediting our
account. When they reduce their liability to us, they are debiting their liability
account.
So, if you can identify what you received and where it came from in every
transaction you have debits and credits mastered.
Request More Information and Tutorials here:
Get a Debits & Credits Tutorial |
Accounting System Basics: a quick primer
What is the difference between an accountant and bookkeeper?
Bookkeeping Training and Accounting Training are Different
Financial Analysis- the accountants tool
Accounting Training: Consider your Options
Basic Accounting |
