Debits and Credits - Aspects of Transactions

Aspects of Transactions

Debits and credits form two opposite aspects of every financial transaction in double-entry bookkeeping. Debits are entered on the left side of a ledger, and credits are entered on the right side of a ledger. Whether a debit increases or decreases an account depends on what kind of account it is. In the accounting equation: Assets = Liabilities + Equity (A = L + E), if an asset account increases (by a debit), then one must also either decrease (credit) another asset account, or increase (credit) a liability or equity account.

For example, from a bank customer's perspective, when the customer deposits cash into his bank current account (US: checking account), this financial transaction has two aspects: the customer's cash-in-hand (the customer's asset) decreases and the customer's current account balance (the customer's asset) with the bank increases. The decrease in the cash-in-hand asset is the customer's credit while the increase in the asset balance in the bank current account is the customer's debit.

The bank views that transaction using the same rules, but from its different perspective. In that example, the bank's vault cash (asset) increases which is a debit, and the corresponding increase in the customer's current account balance (bank's liability) is a credit. This is why a customer's bank statement issued by the bank shows the bank's liability to the customer, with increases (bank deposits) as credits, and decreases (bank withdrawals and cheques) as debits.

In summary: an increase (+) to an asset account is a debit. An increase (+) to a liability account is a credit. Conversely, a decrease (-) to an asset account is a credit. A decrease (-) to a liability account is a debit.