Debits and credits are often a confusing concept because the words seem to be really technical but in reality, their definition or meaning is really quite simple. They’re just weird names to say that this is the left side of an account and this is the right side of an account.
If you don’t want to read on, here’s a quick video that explains debits and credits to you in an easy way.
Let’s understand the meaning of debits and credits…
Back in the olden days and still to this day, when someone records a sale, there are two things that are recorded. The fact that a sale was made and then the cash that came in from that sale. It was more accurate to record this in two sides so that you could check that things equaled each other.
So there needed to be a left side and a right side.
But the right side didn’t always result in an increase (sale), and the left side didn’t also always result in a decrease (cash is not going down) so there needed to be some generic name instead of left and right.
Debit and credit.
Going back to the sale, when a sale is recorded, the right side of a sales account (that’s the compartment where you record all things to do with sales) meant that it would increase. But then a sale brought in cash, so the left side of the cash account would increase. So in this case, a debit and credit could both lead to increases.
Some people think debit and credit means to reduce and to add to.
It doesn’t mean this but this misunderstanding comes from their bank statement.
When you get a bank statement, you get the debits and credits from the viewpoint of your bank.
A credit to them means that cash goes out of their bank account, while a debit means that cash goes in their account. Flip that around to your perspective so that the bank’s credits are actually your debits and the banks debits are actually your credits.
That’s why people generally link up a credit as being something beneficial for them; however, it also means that for someone else, there is a reduction.
For example, a credit card means that for the bank, cash is reduced via a “credit” - a decrease in cash. While for the holder of the credit card, it means that they can use the bank’s money to spend (and pay back later).
So there you have it, debits and credits are just names of the left and right side of an account, not whether something is increasing or decreasing.