Credit vs. Debit

The foundation of accounting is double entry bookkeeping. The use of the terminology debits and credits in accounting differs from how banks use them with their customers. Initially, for some, this can be confusing.

But it is important to understand the fundamental difference. In double entry bookkeeping, assets are called debits and equities are called credits. The terms debit and credit originate with the words debtor and creditor. To be exact, a debtor of a business is someone against whom the business has a claim. For the business, this is translated as an asset.

A creditor is someone who has a claim against the business, which is considered an equity. In contrast, for a bank, the accounts of their depositors are called credits. They are called that in the banking world because for the bank, it owes the amounts deposited to their customers.

In accounting, revenues are credits and expenses are debits. Debits can be defined by what the money bought like assets or expenses. When a business pays wages, it is essentially buying labor and is considered a debit. On the other hand, credits show where the money came from. For example, these could be liabilities, ownership or revenues.

Just like there are two sides to every coin, there are two sides to every accounting transaction. Bookkeeping involves recording the exchange. Whether something is bought or sold, some other commodity must have been exchanged in the process of the transaction. The things that are received in the exchange are recorded as debits. Whereas the things that are given in return for the exchange are recorded as credits.