Debits and Credits
Most people use a system of accounting known as single-entry accounting when they record transactions relating to their checking or savings accounts. For each transaction, one entry is made (either an increase or decrease in the balance of cash in the account).
Debits and credits are used to describe each of the two-entry transactions. If you have been using a bank account for any period of time, you likely have an idea that debit means decrease while credit means increase. That is, however, not exactly true. Depending on what type of account, debit or credit can either increase or decrease the account.
- Debit entry: Increase asset account + Decrease liability or owners’ equity account
- Credit entry: Decrease asset account + Increase liability or owners’ equity account
From the perspective of your bank, your checking account is a liability. It is money that they owe you. Because it is a liability, your bank credits the account to increase the balance and debits the account to decrease the balance.
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