bookkeeping standards - credit, debit reversed??

[Northern_Piper]

As bookkeeper says, most people get the idea of “credit” being a good thing because that’s what their bank statement or credit card statement says.

You go into the bank (in the old days ), you say “I’d like to put $100.00 on my Visa bill,” and the teller says “We’ll crédit your account.” So you think, “a credit is a good thing”.

But the reason they say “credit” is because that means by paying off the bill, you have decreased the asset value of your credit card account, from the bank’s perspective, so it’s a credit entry.

(The payment has simultaneously increased the bank’s cash on hand, an increase in that asset, so it will be a debit to that account in the bank’s books.)

If you were keeping double-entry books for your own budget, you would enter the payment to your Visa account as a debit, because by paying the amount owing, you have decreased your liability. On your books, it’s a debit, on the bank’s books, it’s a credit, from your respective perpectives.

Again, go back to the definitions of debit and credit I gave earlier.

A transaction goes on the debit side of an account if it increases the assets in that account, or decreases the liability.

A transaction goes on the credit side of the account if it decreases the assets in that account, or increases the liability.

From your perspective, making a payment on your credit card reduces your liability on the credit card account, so on your books, it’s a debit.

But from the bank’s perspective, that payment has decreased the asset value of your credit card account, by reducing the amount owing to the bank. So the bank records it as a credit.

The same transaction is thus a debit from your perspective, and a credit from the bank’s perspective.

But because the average consumer doesn’t keep double-entry books, they only get a credit card from the bank’s perspective, which shows the payment as a credit.

One final point: if you have a line of credit with the bank, and it’s maxed out, do you see that as a good thing?

[CookingWithGas]

@Slash1972

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.

No, it is a “debit” to your account because that is what “debit” has been defined as.

You think it’s a credit because that’s what the bank keeps telling you. The bank credits your account, but you debit it.

You are playing catch with the bank. You throw a ball over the fence, and the bank catches it. The bank tells you, “We have caught your ball.” They tell you this over and over again, for years. And so you say, “Yes, my ball has been caught.” But from your perspective, you *threw *the ball.

[MrAtoz]

@Northern_Piper

As bookkeeper says, most people get the idea of “credit” being a good thing because that’s what their bank statement or credit card statement says.

You go into the bank (in the old days ), you say “I’d like to put $100.00 on my Visa bill,” and the teller says “We’ll crédit your account.” So you think, “a credit is a good thing”.

I think that I understand all of this bookkeeping stuff, at least vaguely. But to be fair, don’t most people think of credit as a “good thing” because the word “credit,” in general, is positive?

A really good baseball player is a credit to his team. You get credit for passing a class in school. If you come forward to admit to screwing something up, your honesty does you credit. States give full faith and credit to the laws of other states.

It’s massively counter-intuitive to see a phrase like “a credit is a decrease in assets.”

[Slash1972]

@CookingWithGas

No, it is a “debit” to your account because that is what “debit” has been defined as

That’s fine, I’m cool with that.

I call “withdrawing money” out of my checking account a “debit” because I use my “debit card” to do it

[Wrenching_Spanners]

@MrAtoz

I think that I understand all of this bookkeeping stuff, at least vaguely. But to be fair, don’t most people think of credit as a “good thing” because the word “credit,” in general, is positive?

A really good baseball player is a credit to his team. You get credit for passing a class in school. If you come forward to admit to screwing something up, your honesty does you credit. States give full faith and credit to the laws of other states.

It’s massively counter-intuitive to see a phrase like “a credit is a decrease in assets.”

Every accounting transaction is going to have a debit and a credit. We shouldn’t use the word positive, because that can be confused with numerical sign. But whether a transaction is “good” for you is going to depend on the accounts being credited or debited.

For example, when you’re paid, if you’re keeping a personal accounts ledger, you’re going to debit your cash account (the asset account that represents your bank balance) and credit your income (revenue) account. Both of these actions are good.

But then suppose you have to pay a parking ticket. You’re going to credit your cash account and debit an expense account. Both of these actions are bad.

Credit meaning good/bad or gain/loss depends entirely on context. And indeed, it can often be neutral.

[Wrenching_Spanners]

@Slash1972

That’s fine, I’m cool with that.

I call “withdrawing money” out of my checking account a “debit” because I use my “debit card” to do it

And when you do, you’re debiting your pocket money account.

[Wrenching_Spanners]

@Northern_Piper

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".

Funnily enough, at least from a corporate accounting perspective, that’s not true. I deal with multi-book ledgers all the time. The most common reason is that a business is keeping track of accounts in multiple currencies. For example, suppose a Canadian firm has a US subsidiary. That subsidiary will likely keep both a USD book and a CAD book. So a 100 USD purchase will have a 100 USD credit to cash and a 100 USD debit to expenses in the USD book, but also a 135 CAD credit to cash and a 135 CAD debit to expenses in the CAD book. Over time, and as exchange rates change, that can actually lead you to have a gain in one ledger account, and a loss in the other ledger account, even though the same physical transactions have been entered.

Another reason is that some governments, such as France, require the use of statutory accounts. So you keep a ledger where transactions are entered into the state’s designated accounts, and a ledger where transactions are entered into the corporate set of accounts. Of course the two “books” have to reconcile, and are going to be reporting the same information at a high level of summarisation, but they’re two genuinely distinct ledgers. Likewise a corporation with diverse subsidiaries may have subsidiaries that maintain a local detailed ledger, but also a more general corporate ledger. For example, a grocery store may have 20 different accounts for food loss (spoilage, damage, expiry, theft, in-store use, etc.), but the corporation that owns the grocer, but also owns a clothes store and a sporting goods store, may just have two accounts for those loss expenses.

[Northern_Piper]

Fair points. I was thinking about, shall we say, imaginative two-book systèmes that come to the attention of the criminal courts.

[Northern_Piper]

@MrAtoz

I think that I understand all of this bookkeeping stuff, at least vaguely. But to be fair, don’t most people think of credit as a “good thing” because the word “credit,” in general, is positive?

A really good baseball player is a credit to his team. You get credit for passing a class in school. If you come forward to admit to screwing something up, your honesty does you credit. States give full faith and credit to the laws of other states.

It’s massively counter-intuitive to see a phrase like “a credit is a decrease in assets.”

Well, it’s been used in this sense for close to 4 centuries. The terms have been used in this sense for bookkeeping purposes in English as early as 1633.

Some bookkeeping theories suggest that credit posts should always be recorded as negative numbers:

@[Debit and Credit

(Debits and credits - Wikipedia)]For simplicity it is often best to view Debits as positive numbers and Credits as negative numbers. When all the debits and credits that are transacted in each account are added up the resulting account total could be a net Debit (positive number) or a net Credit (negative number). If the total of the account is in a net Debit position (positive), it is generally classified in the Asset section of the balance sheet, whereas accounts that total to a net Credit (negative) are shown in the liability section of the balance sheet.

[Northern_Piper]

Oh, and the phrase “full faith and credit” does in fact use the term “credit” as a liability, from the perspective of the state which has to recognize the law of another state. State A is required to comply with the rights granted to the individual by the law of State B. State A has no choice in the matter.

[MrAtoz]

@Northern_Piper

Well, it’s been used in this sense for close to 4 centuries. The terms have been used in this sense for bookkeeping purposes in English as early as 1633.

Give me one good reason why a centuries-old usage shouldn’t be abandoned, so as not to contradict my limited knowledge!

[dba_Fred]

I wish this thread was around (and I’d read it) those many moons ago when I took Accounting 101. Eventually I came to realize that whether a transaction was a Credit or a Debit depended on which side of the bank’s counter a person was standing on.

[CookingWithGas]

@dba_Fred

I wish this thread was around (and I’d read it) those many moons ago when I took Accounting 101. Eventually I came to realize that whether a transaction was a Credit or a Debit depended on which side of the bank’s counter a person was standing on.

There was once a lead accountant who was held up as an example to all the other accountants. He was very highly paid and universally respected. But had some mysterious habits. Every morning he would arrive for work, unlock his desk, and pull out a little book. He would open the book, read it for a moment, then put it back in his desk and lock it. One of the apprentice accountants noticed this daily habit and realized this must be the secret to the lead’s success. He started watching this day after day after day.

One day the apprentice decided to eliminate the lead, learn his secret, and take over his job. He poisoned the lead’s coffee, then broke into his desk. He opened the precious book. The only writing was on the first page, and it said:

Debits on the left, Credits on the right

[Northern_Piper]

[Northern_Piper]

@dba_Fred

Eventually I came to realize that whether a transaction was a Credit or a Debit depended on which side of the bank’s counter a person was standing on.

Precisely!

My work here is done.