Accounting is a subject that is not terribly complicated a lot of the time but it can be misleading. One of the times when accounting tasks seem to mislead people the most is when it is talking about debits and credits. These terms may mean the opposite of what you might think which can lead to costly errors. Here is an explanation of what debits and credits are and how they differ from each other.
Is It A Debit Or A Credit?
When you are asking if something is a debit or a credit then you need to understand that the answer depends entirely on your perspective. What is a debit to your business is a credit to another business and vice versa. What you need to understand is what the terms debit and credit mean to you. They will mean the opposite to the institution on the other end of the transaction and while you will both refer to the given amount by different terms you will both be right.
Why Are Debits And Credits So Confusing?
Telling the difference between a debit and a credit is so confusing for most people because when you use these terms in everyday life away from accounting activities then you usually refer to debits and credits not from your own perspective but from the perspective of the bank or other institution. From this vantage point credits are amounts that are added to an account and debits are amounts that are taken away from accounts. The problem is that when you are doing the accounting for a business then you are operating from the perspective of the business so the meanings are reversed.
Defining Debits And Credits
Debits and credits are not difficult to understand once you get used to your new perspective as a business owner or as someone doing the accounting for a business. This means that when you debit cash you will be adding that amount and when you credit cash then you will be subtracting that amount. While banks and other institutions call adding money to your account a credit, it means that they are subtracting money from their balance. You are just on the outside looking in so that’s why this seems so backwards. Once again, when you debit you add and when you credit you subtract.
Where Do Debits And Credits Go?
This question isn’t meant to ask where the money goes in the process of a debit or credit transaction. It refers to the typical placement of debits and credits on an accounting ledger. Debits go in the left column and credits go in the right column. Even if you have accounting software to help you out with your accounting you still want to understand what should be going where so that you know the accounting calculations are being done correctly.
Is it a debit or a credit? This isn’t a hard question but most people learned it backwards. When you are doing the accounting for a business then you need to take the time to realize that the words have different meanings when you are the one on the inside of the business looking out.
Thomas Rheinecker enjoys writing about how to get an online accounting degree.
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