I know virtually nothing about bookkeeping and accounting. I am now reviewing some records of an account in which payments out of the account are listed as credits, and deposits into the account are listed as debits. I had asked some people about this before and they had said that this is a way of doing accounting. I didn’t understand it then, and I still don’t. I can’t quite figure out what perspective would lead to this method. I presume it’s some normal way of accounting in some world, but I need to get a better handle on the theory behind it. Can anyone enlighten me?
Because it’s double-entry bookkeeping, which enters equal amounts in two different accounts, one an addition and one a subtraction. What each is called depends on the type of account. Adding amounts to Assets or Expenses are debits, adding them to Liabilities, Equity or Revenue accounts is a credit. Subtracting from the first two are credits and subtracting them from the last 3 are debits.
Disclaimer: I was trained as a bookkeeper coughcough years ago and have never actually used the knowledge professionally, so I’m a little rusty, probably.
“Debit” is an increase in assets or decrease in liabilities, for a particular account in your books.
“Credit” is a decrease in assets or an increase in liability, for a particular account in your books.
Note that this same transaction can be a debit for one person and a credit for the other, and also both a debit and a credit in the two different accounts in your own books.
If you deposit money into your bank account, on your books that is a debit to your bank account: your assets have increased.
But from the bank’s perspective, that is a credit: the bank now owes you that money, so it’s an increase in the bank’s liability.
Now you take out some of that money to pay a bill.
On your books, that’s a credit to your bank account. because your assets have decreased. But it’s simultaneously a debit to your accounts payable, because by paying the bill, you’ve decreased your liability.
And, from the bank’s perspective, that transaction is a debit to your account, because by paying out that money, the bank has decreased its liability to you.
Yes, it’s exactly as Northern Piper states. The reason everything seems backward when reading about accounting as it is done by accountants and bookkeepers is that most people deal with entities that make the bookkeeping entries on their own books, and those entries are the exact opposite of the entries one would make on one’s own books. It’s always “We, the bank, will debit your account due to your withdrawal or credit your account for your deposit”, although I suppose they might use the passive which obscures things a bit. Regardless, your account at the bank is really the bank’s account of what they owe you (for a deposit account) or what you owe them (for a loan). The bank makes the entries as they are viewed from the bank’s accounting system. If you were to make your own official book account of what the bank owes you, following standard accounting principles, you would do the exact opposite of the bank because an asset in your view is a liability in their view and similarly vice versa.
There’s no reason, however, people keeping their own record of bank transactions would ever formally keep books unless they were running their own business and needed to keep track of their income and expenses closely either for tax purposes or to know whether they’re actually making money. In that case, when the focus is on the income and expenses, as opposed to the assets and liabilities, debits and credits sorta work the way people are “used” to, in that when you record an expense, that’s a debit. But it’s to the expense account, and it’s a credit to the bank account.
Don’t worry if it confuses you. If you don’t plan on becoming a bookkeeper or accountant, you don’t need to wrap your head around it. If you need to understand for other reasons, the best thing to do is to get people to just use negative and positive numbers. If you reckon your balance is negative, you owe money. That makes sense. The fact that in accounting debits are positive and credits are negative by convention is not relevant - if you just ignore that convention and focus on deposits into an account as being positive numbers in that account, it’s much easier. It makes things harder when you reckon your income, since it’s reversed to how you reckon your current status, and this duality of things takes a bit to get used to. Don’t plan on understanding it overnight. I regularly test in the top 99.95% of intelligence (I hate to mention that fact, but it’s relevant to my point) but it took me about a couple days of serious studying before it finally clicked in my head what was going on. For most people, it would probably take an entire semester. It’s utterly mindbending, but once your mind is bent in the right way, it makes absolutely perfect sense, and is actually quite beautiful in how it ties all the aspects of accounting together into just two types of entries, debits and credits, in such a way that they must always be equal (or if using the positive/negative interpretation, they sum to zero).
My father was an accountant and besides his regular job, also kept the books for his church - to double-entry book-keeping standards, I’m sure. He retired from that, but came back later to help the church secretary - who now used Quicken to keep the books. I knew Quicken, so helped Dad install it on his computer and attempted to show him how to use it. We spent a good couple of hours not understanding each other before we finally realized what he meant by credit and debit wasn’t necessarily what I meant by the same terms. Once he understood Quicken was basically a digital checkbook, he was okay with it. (Although I’m sure he was a little appalled that you could go back and change historical transactions with no record.)
With all due respect, such explanations are don’t really clarify much. (E.g., the bolded words are a repetition, and thereby present no contrast.)
All of these explanations are just saying what word is used when, which is not really answering the question, or presenting a conceptual basis for the use of these terms, but just repeating what the OP described. Yes, the information is coming from experts, but the pedagogy is lacking. (I’m sorry, but a teacher who says, “Don’t worry if if confuses you – just forget about it!” would be fired.)
The question that hasn’t really been emphasized is, why does a bank need to do bookkeeping from a different perspective (because this is really about banks, isn’t it), and why would that lead to the use of these particular terms in these ways, especially when using debit as a verb as opposed to debits as a noun, because then agency is involved. To just say, “‘Debit’ is an increase in assets or decrease in liabilities, for a particular account in your books,” is too abstract if you’re contrasting it with household fiance, and doesn’t explain anything unless you contextualize it more and stipulate that it’s because of what banks do.
No, there is no need to “contextualise” it as something different that banks do.
All bookkeepers keep their books from the perspective of their operation. Change the example to two businesses dealing with each other (e.g. Retail business buying from wholesale business) and a payment that shows up as a debit on the retailer’s books will be a credit on the wholesaler’s books.
There is nothing special about the banking example. Double entry bookkeeping works the same for all who use it.
It’s not banks specifically - it’s also the electric company and the cable company. A large part of the reason it doesn’t make sense is because few people (if any) use double-entry bookkeeping in their household finances. ( It didn’t make any sense to me either when I started taking that single accounting class 30 years ago.) I’m going to try to explain as a non-accountant ( and I may not be successfull) . Lets say you own a grocery store and I own a soda distributor. You buy $100 worth of soda from me. You are going to increase “accounts payable” by $100 and I am going to increase “accounts receivable” by $100. When you increase the “account payable”, you do do so by crediting it. When I increase “accounts receivable”, I do so by debiting it. When you pay your bill, you debit the “accounts payable” account and credit the “cash” account , while I record the payment by crediting “accounts receivable” and debiting “cash”. Each transaction between the two of us results in four entries, a credit and a debit for you, and a credit and a debit for me.
Remember back at the beginning where I said most people don’t use double-entry bookkeeping for their home finances? That means you only see one of the four accounts. You don’t have “accounts receivable” and “cash” accounts for your household. ( You may keep track of “cash on hand” , but that’s something different. ) The cable company doesn’t send you a statement of their “cash” account. Your cable bill is essentially a portion of the cable company’s “accounts receivable” , which reflects a charge as a debit and a payment as a credit.
I think I understand why a bank would consider a deposit in my account a debit, from their perspective. At least, I now accept that is what’s done. What I don’t understand, and I think this is a separate matter - but maybe not - is the fact that they report MY account to me from THEIR perspective. From now on, I will do the mental gymnastics to adopt the switch when I see the account, but I can’t figure out why I need to do that if there’s a version of the account (the reverse of theirs in double bookkeeping?) that lays out credits and debits from my perspective.
Because they keep all their records from their perspective - there isn’t a version from your perspective. Their “cash” account contains entries from all their customers, not just you.
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First, the bank considers a deposit to your account a credit, from their perspective. That amount is booked as a payable on their books, which is an increase in a liability. So it’s a credit entry.* (*You *should consider this a debit, which is booked as cash, or possibly a receivable from the bank, so it’s an increase in an asset.)
The bank does it because they are the bank, and this is the way all banks have always done it. The bank is responsible for its books, and you are responsible for your own books.
I suppose they could say, when they charge you a fee, “We have debited your account on our books $20 for an overdraft fee, and so therefore you should credit the corresponding account in your own books for that amount” but that would confuse almost everybody.
*They will also have an offsetting debit of cash received, or something similar, in double-entry accounting.
If you want to see it from your perspective, you have to keep your own books.
When I get my monthly statements from the bank regarding my checking and savings accounts, they translate them into customer-speak. I.e. they list my deposits as deposits or credits and my withdrawals as debits. I presume that they have their own versions, as described above, for their own purposes. It’s just that I have access to a different account that doesn’t do it that way. Clearly, a bank can set up their software to report information any way they want. Now that I sort of understand why they do it “reversed,” I still wonder why they don’t all report it to customers from the customer’s point of view. Obviously, some banks do.
But that report is not from the customer’s perspective. It’s from the bank’s perspective.
When you deposit money into your bank account, from the bank’s perspective, that is an increase in their liabilities, with respect to your account: they now owe that money to you.
Since it is an increase in their liability to you, it is a credit.
When you withdraw money from your account, that is a decrease in the amount the bank owes you. Since it is a decrease in their liability, it is a debit in their records of your account.
The terms “Debit and credit” have no equivalency to the terms “deposits and withdrawals”. From your perspective, a deposit is a debit to your account. From the bank’s perspective a deposit is a credit to your account.
When you withdraw money, that is a credit to your records of your account, and a debit to the bank’s records.
As to why the banks don’t record it in a separate set of books from the customer’s perspective, two reasons: 1 they keep their books for their purposes, not the customers; and 2 accountants and tax auditors get very upset when they hear the phrase “two sets of books”. 
And, as Cooking with Gas said earlier, since this is double-entry bookkeeping, each of your transactions with the bank will result in two entries in their books.
When you deposit money to your account, that increases the bank’s liability to you. An increase in liabilities is credit.
But, your deposit means that the bank has a little bit more money that it can play with, such as loaning money to someone else. So the bank will have an account like “Cash reserves” or some such name. Your deposit increases the assets in that account, so the bank will enter it as a debit to their cash reserves.
If you withdraw money, that decreases their liability to you, so it will be a debit to their record of your account. But, it simultaneously decreases the amount of cash reserves, so your withdrawal will be listed as a credit to their cash reserve account.
“Dr = Cr”. Debits must equal credits in double-entry. If they don’t, the books aren’t balanced, and that’s an indication a mistake has been made.
That is bank-speak.
Bank’s perspective: When money goes into your account, the bank got a wad of cash in their hand, but it is associated with your account so they owe it back to you, because you could ask for it back anytime. When they bank owes you money, that’s a payable, so it’s a liability. To the bank, your account is a liability. When the bank *increases *a liability it’s a *credit *entry. So they credit your account.
**Your perspective: **When money goes into your account, the bank owes you money, so to you that’s a receivable, so it’s an asset. To you, your account is an asset. When you increase an asset, it’s a *debit *entry. So if you were to keep a double-entry accounting system, you would debit your account.
Ah, this thread is a perfect example why the number of people that start out majoring in accounting at most major universities is about 3x the number of people that actually graduate with a degree in accounting.
<raises hand> I use double-entry bookkeeping for my home finances, but that’s mainly because I was an accountant for almost 40 years, and found any other way to be ‘wrong’.
Two basic accounting principles I was taught were:
a) Debit and Credit have no intrinsic meaning - in your General Ledger (the very first place anything is entered) a Debit is a number that goes in the left column, and a Credit is a number that goes in the right column.
b) Far more important than the size of the amount is knowing which account it is properly entered into. Get that right and your accounts will balance and your reports will make sense.
One way to look at bookkeeping is that everything should balance to 0. In the bank’s books, the amount of your paycheck deposit (CR to Liabilities) should equal the increase in the bank’s available cash (DR to Assets), but equally in your books, the amount of your deposit will be a DR to your bank account asset and a CR to salary revenue for a net 0.
Note that your DR for the deposit and the bank’s CR for the deposit also total 0.
Note also that both your bank account and year-to-date salary revenue have increased, which is handled in bookkeeping by having the two types of accounts assigned to opposite sides of the bookkeeping entry - hence the bit above about DR and CR having no intrinsic meaning - they are arbitrarily assigned to make it possible for the books to balance to 0 (which makes keeping accurate records MUCH easier).
Can you explain this part more? From MY perspective, a deposit is a credit to my account.
(I understand the double-bookkeeping rules, but I still think of “crediting” my account when I make a deposit.)
If the answer is “No, it is a “debit” to your account because that is what “debit” has been defined as”, then that’s okay.
The confusion arises because most people only ever see the bank’s side of the entries as reported in your bank statement, where your deposit is a credit in the bank’s accounts. And yes, as explained above, ‘debit’ and ‘credit’ are essentially arbitrarily defined to make sure the accounts can balance to 0.
Additional confusion arises from the use of the same ‘credit’ term for the extent that amounts that might be loaned to you or allowed to be charged by you for later payment. These would be entered as a credit in your accounts payable liabilities if you do double-entry bookkeeping. (It’s possible that the word ‘credit’ may have come from Latin ‘credere’ to entrust as identifying amounts you are trusted to repay.)