06 May Understanding the Difference Between Debit and Credit

Let’s debunk debits and credits, those mysterious entries on your bank statement. They may seem like similar concepts. In fact, they are polar opposites in the financial void we call accounting. Read on for a light shed on the world of debits and credits– what they are, why they’re there, and how they impact your life. In essence, their definitions are as follows:

• Debit: a decrease in an account’s value, like a withdrawal or loan.
• Credit: an increase in your account’s value, like money or a new asset.

Essentially, debits and credits are used to record changes in entries in an account and its value.

Debit

Debit signifies a change in account value or the addition of a liability. When your account is debited, money is taken out of your account.

When you tap or swipe your card, your bank and card network (like Visa or Mastercard) is notified electronically of your purchase. The institution checks there is money in your account and that your card isn’t stolen, and then you get the Approved message. This charge reduces the amount of funds in your account.

Credit

Credit is when your account is positively changed. Think of getting your salary or a new asset, like a car. It’s the opposite of debit because debit negatively impacts your balance and credit positively impacts your account.

It could also signal a reduction of liability, like paying off debt.

Debit vs. credit cards

This might be confusing because you just read that debit takes money away and credit adds money. This is only partly true in the case of bank cards. The terms debit and credit are creative marketing terms by banks.

Debit cards contain your savings. When money is added, your account is credited. In contrast, credit cards debit money from your overall balance, as you’re spending funds in anticipation that you can repay your creditor, be that a bank, credit union,  or loan company.

Here’s a breakdown of key debit and credit facts:

• Expenses are increased by debit and decreased by credit.
• Assets are increased by debit and decreased by credit.
• Liabilities are increased by credit and decreased by debit.

Make sense?

Examples

Jessica just got a new credit card from First National Bank (FNB). She uses it to buy groceries and new clothes. At the end of the month, she makes a debit order–a transaction that takes money away– to pay off her credit card debt.  Her account was debated to pay off a liability, her credit card debt. She can pay off her debt because her account was credited her monthly salary. 

If in doubt, remember that debit starts with debt, and credit is the opposite of debt.

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