The difference between DEBITS and CREDITS

What is the difference between debits and credits? Credits are a good thing, right? After all, I just got a store credit!

Hmmm. Many folks find bookkeeping or accounting transactions - or the concept of debits and credits - very confusing because they are looking at it backwards. I know because when I first learned accounting I was totally confused! So here goes.

Debits and credits aren't good or bad, per se. However, if you are talking about your checking account, then you want DEBITS. Why? Because debits always add money to a checking account and credits always subtract money from a checking account. Surprised? Keep reading!

First, remember that every bookkeeping transaction consists of a debit and credit of equal value. (That's why it's called double-entry bookkeeping.) Some account receives the debit while another account receives the credit. The debit or credit can be split between multiple accounts, but the total debit always equals the total credit.
If I deposit $200 in my business checking account, the account gets debited $200 and it's balance increases by $200. Whoa! That confuses folks because they think that debits are the "bad guys" and take money away.

Likewise, if I write a check, my accounting software credits my checking account ... yes, subtracts money from it and reduces its balance. Wait ... you thought credits gave you money because when you returned that widget to the store, the store gave you money back. (And if we do a good thing, folks might say "I'll give you credit for that!")
But it's true: a debit adds to an account balance while a credit subtracts from an account balance. So, WHY are we confused?

We're confused because we've learned these terms from dealing with stores, banks, and charge card companies, and these entities use these terms from their perspective, not ours! When you return an item and your charge card gets a credit, the charge card company is subtracting from your account balance ... crediting your account. Bad for them, good for you.

And when the bank charges you for the box of checks you had printed, they debit your checking account. Stay with me now. Yes, they are adding to your account balance. HOWEVER, from the bank's perspective, your checking account is a negative account - a loan you might say. So when they debit your negative account, they're actually making the balance less because the negative balance gets smaller.

You see, you are actually loaning your money to the bank to use as they wish ... it's not just sitting there in the vault. But they know they owe you that money if you ever come in and want to close your account, so to them your checking account is a liability - a negative or credit account - and negative accounts maintain a negative balance.

Remember, a debit adds to an account balance while a credit subtracts from an account balance. This is easy to understand when discussing positive accounts - or accounts that maintain a positive balance in the accounting system. But it's more difficult to visualize when discussing negative accounts as discussed above. If you pay $100 on a loan, you credit (subtract from) Cash and debit (add to) the loan account $100. This decreases the loan account's balance because loan accounts are "negative" accounts or "credit" accounts and when you debit a negative account, the balance - a negative number to the accounting system - gets smaller.

If you have trouble understanding debits and credits and how they work with accounts that maintain negative values, we urge you to read our unique and popular tutorial on our main website, Accounting: Making Sense of Debits and Credits.

Our Making Sense of Debits and Credits tutorial is powerful because it uses elementary math concepts to unravel the mystery of bookkeeping transactions! New or unsure about accounting? You'll find many beginning accounting tutorials on our main website.

Also, if you'd like a list of sample transactions (debits and credits) for some of the most common journal entries you will have to know and use, read Super Sample Accounting Transactions on our main website. We explain why the accounts are debited and credited as they are.

Cheers!