What they are in bookkeeping . . . and why that’s different from the common way we use the terms.
Some background:
Bookkeeping uses a method called double-entry.
This simply means every transaction has two parts.
For example, you purchase some office supplies and pay for them by writing a check.
You’ve increased an expense (office supply expense) and decreased an asset (your checking account).
Both of these are the result of this one transaction. A double-entry.
Debits and credits are the terminology for tracking transactions in double-entry bookkeeping.
Every transaction has equal debits and credits.
When we use the terms ‘debit’ and ‘credit’ in everyday language,
the terms are often reversed from how transactions are recorded in your company.
This is because the terms are from the point-of-view of other companies and institutions.
For example, when a bank ‘credits’ your checking account, your checking account balance goes up.
And from the bank’s point-of-view, money going into your account is a credit – for them.’
From your point-of-view, money going into your checking account is a debit.
Just as increasing your checking account is a debit, reducing that same account is a credit.
The opposite.
You may hear the terms ‘debit’ and ‘credit’ from your accountant,
but realize the terms are just terminology to distinguish between increasing and decreasing
the 5 types of accounts (assets, liabilities, equity, income, expenses)
in double-entry bookkeeping.
For reference:
| | Debit | Credit |
| Asset | increase | decrease |
| Liability | decrease | increase |
| Equity | decrease | increase |
| Income | decrease | increase |
| Expense | increase | decrease |
