Debits and Credits - Terminology

Terminology

The words debit and credit are both used differently depending on whether they are used in an accounting sense, or non-accounting sense.

In a non-accounting sense, according to knol, a "debit" is:

• A written note on bank account or another financial record of a sum of money owed or spent, or
• a sum of money taken from a bank account.

In a non-accounting sense, according to wordnet, "credit" is

• Money available for a client to borrow.

Thus, in a non-accounting sense, "credit" is money that a creditor makes available to a client to borrow. However, "credit" in this sense is not an accounting term, although this word comes up regularly in business and therefore accounting. In the academic field of accounting (bookkeeping), such dictionary definitions are misleading and the words "debit" and "credit" as used in accounting have little connection with the nonprofessional's understanding of "debit" and "credit". This may seem confusing at first, but one will find when studying accounting that "debit" and "credit" are essential for the double-entry system of bookkeeping.

When recording numbers in accounting, a debit value is placed on the left side of a ledger for a debited account and a credit value is placed on the right side of a ledger for a credited account. A debit or a credit either increases or decreases the total balance in each account, depending on what kind of accounts they are.

Each transaction (say, of value £100) is recorded by a debit entry of £100 in one account and a credit entry of £100 in another account. When people say, "debits must equal credits" they do not mean that the two columns of any ledger account must be equal. If that were the case, every account would have a zero balance (no difference between the columns) which is often not the case. The rule that total debits equal the total credits applies when all accounts are totalled.

More than two accounts may be affected by the same transaction. A transaction for £100 can be recorded as a £100 debit in one account and as multiple credits that total £100 in other accounts.

Example:

I owe creditors A and B £100 each. Thus my liability account for Creditor A has a credit balance of £100 and the same for Creditor B. I pay them off from my bank chequing account, which from my point of view is an asset. I withdraw £200 from my bank account and split it to pay off the two liabilities. In my records, "Creditor A" is one account, "Creditor B" is another account, and "Bank" is a third account. The following transactions affect all three-ledger accounts:

Dr: Creditor A (100)

Dr: Creditor B (100)

Cr: Bank (200)

When I write two £100 cheques for a total of £200, the balance in my bank account is reduced by £200. In my records, my "Bank" ledger account has an asset debit balance, which is reduced by the credit for £200. Amounts in my records for the two creditors are liabilities, which are reduced by the two debits totalling £200.

Therefore for this transaction, the total amount debited = 200 and the total amount credited = 200. When all three accounts are totalled, the total debits equal the total credits.

At the end of any financial period (say at the end of the quarter or the year), the total debits and the total credits for each account may be different and this difference of the two sides is called the balance. If the sum of the debit side is greater than the sum of the credit side, then the account has a "debit balance". If the sum of the credit side is greater, then the account has a "credit balance". If the two sides do equal each other (this would be a coincidence, not as a result of the laws of accounting), then we say we have a "zero balance".