Terminology of Credits

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

In a non-accounting sense, "debit" is:

• a sum of money taken from a bank account.

In a non-accounting sense, "credit" is

• a sum of money placed into a bank account.
• money available to spend.
• money available to borrow.

The reason why individuals see debits and credits in the above manner, is that the bank statement presented by the bank to the customer is the bank's view of the account. The bank views money in a chequing account as money the bank owes to the customer, i.e. a liability, and in the rules of accounting, an increase to a liability account is a credit. Likewise, when a bank lends money to a customer and places the money into the customer's chequing account, the bank has increased its obligation to pay that money, which is a liability, and this increase is a credit and appears in the credit column of a bank statement.

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 totaled.

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.

Cr: Creditor A (100)

Cr: Creditor B (100)

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 ac
Dr: Creditor A (100)count, and "Bank" is a third account. The following transactions affect all three-ledger accounts:

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. Based on the law of accounting, a decrease in my cash asset is a credit. The total credit for my asset balance is greater than the total debit. Thus, in my records, my "Bank" ledger account has an asset credit 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 totaling £200.

Therefore, for this transaction, the total amount debited = 200 and the total amount credited = 200. When all three accounts are totaled, 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".

Debit cards and credit cards

Debit cards and credit cards are creative terms used by the banking industry to market and identify each card. From the cardholder's point of view, a credit card account normally contains a credit balance, a debit card account normally contains a debit balance. A debit card is used to make a purchase with one's own money. A credit card is used to make a purchase by borrowing money.

From the bank's point of view, when a debit card is used to pay a merchant, the payment causes a decrease in the amount of money the bank owes to the cardholder. From the bank's point of view, your debit card account is the bank's liability. A decrease to the bank's liability account is a debit. From the bank's point of view, when a credit card is used to pay a merchant, the payment causes an increase in the amount of money the bank is owed by the cardholder. From the bank's point of view, your credit card account is the bank's asset. An increase to the bank's asset account is a debit. Hence, using a debit card or credit card causes a debit to the cardholder's account in either situation when viewed from the bank's perspective.

General ledgers

General ledger is the term for the comprehensive collection of T-accounts (so called because there was a pre-printed vertical line in the middle of each ledger page and a horizontal line at the top of each ledger page, like a large letter Before the advent of computerised accounting, manual accounting procedure used a book (known as a ledger) for each T-account. The collection of all these books was called the general ledger.

"Day Books" or journals are used to list every single transaction that took place during the day, and the list is totalled at the end of the day. These daybooks are not part of the double-entry bookkeeping system. The information recorded in these daybooks is then transferred to the general ledgers. Modern computer software now allows for the instant update of each ledger account – for example, when recording a cash receipt in a cash receipts journal a debit is posted to a cash ledger account with a corresponding credit in the ledger account for which the cash was received. Not every single transaction need be entered into a T-account. Usually only the sum of the book transactions (a batch total) for the day is entered in the general ledger.