*****SPAM***** Re: Accounting 101 Debit -vs- Credit

Dale Alspach alspach@math.okstate.edu
Thu, 18 Jul 2002 08:35:35 -0500

The debit vs credit confusion is the result of common vs accounting usage
of the terms. In double entry accounting the iron rules are that
1. assets = liabilities + equity
2. every debit must have a corresponding credit.

Debit and credit are really just names for the two sides of the ledger line.
The confusion comes from equating these to  subtract and add for all
accounts. The type of account determines the effect.
You can generally keep things straight when dealing with income and expense
accounts because these correspond to common usage. 

If your employer pays you a dollar you would expect your income account to
increase by 1 dollar, so you credit 1 dollar. Now the second iron rule says
there must be a debit to some account of 1 dollar. If you actually put that
dollar in your checking account, it would be a debit. So a debit of an
asset account increases its balance. If you take that dollar out and buy an
ice cream cone, the balance in the checking account must decrease, so it
must be a credit. (debits increase the balance)
The corresponding food expense account must increase but the
second iron rule says that the entry must be a debit. So debits increase
the balance of an expense account.

>From this point on consistency and the two iron rules force everything
else. Here is an example. You take $500 from the checking account to make a
principal payment on your mortgage (liability). This is a credit to the checking
account, Iron rule one reflects the fact that the mortgage balance will
also decrease and iron rule two says that this must be a debit to the mortgage
liability account.

This last thing points out why there is so much confusion. The mortgage
holder (bank) will say that your mortgage was credited. For them your
mortgage is an asset, so decreasing the balance is a credit. Some people
use this idea to keep things straight: assets and liabilities should be
thought of from the bank's perspective with common usage of the terms
debit and credit, e.g., for a liability account a payment decreases the bank's
asset so it is a debit. Personally I find this mixing of the accounting and
common usage confusing.

Dale Alspach