My 100-level accounting instructor said it pretty succinctly: Debit means an entry in the left column. Credit means an entry in the right column. What a transaction means for the business depends on the accounts.
The terms debit and credit have meaning independent of their columnar position on a traditional ledger. I could create a ledger with the columns reverse or (shocking!) use a computer program with a data structure that doesn't encode the concept of left or right.
I think about it like this:
CR / Credit / Creditors -> what the business owes
DR / Debit / Debtors -> what the business owns
A common objection to this is 'what about income and expense accounts'? But those are just equity: https://news.ycombinator.com/item?id=39991837
I wrote more about this here: https://news.ycombinator.com/item?id=32498992
Something I find frustrating is the - almost - endless debate and nitpicking on small details or elements implied but not explicitly stated...but I guess people are trying to be helpful (or right).
I didn't have an account to comment then but I really appreciated your perspective; it was extremely valuable seeing a few people saying 'forget about the credit/debit nomenclature, it's confusing' and recognising not everyone knows the terminology. Now I have an account here and can thank you for fighting the good fight again.
Over the ~20 years since I qualified as an accountant, I've found the concept of debits and credits useful. It has saved me from memorizing rules (like what's on the left and what's on the right), to design charts of accounts, to design rules for recording transactions etc.
Someone who doesn't ever need to design charts of accounts or accounting policies, and is never called upon to verify the correctness of an accounting approach, probably doesn't need to understand debits and credits. They can read a balance sheet and income statement without thinking about the concept.
And many people (even bookkeepers and accountants) are content to memorize rules without needing to understand their source.
But that doesn't mean the underlying concepts don't exist, or that they aren't valuable.
Imagine if there were a subreddit for accountants, some of whom dabbled in coding. There might be a back and forth about principles of objects oriented design. The general consensus might be that it's pointless to understand the principles, and that it would be better to focus on some small set of rules of thumb, that give the right answer in most cases.
They might be right in that context (accountants who code on the side), but it doesn't mean the principles don't exist or aren't valuable for people who do that stuff all the time.
(BTW I think accounting is, in general, taught very poorly. I wish more instructors used Frank Wood's books. An intuitive grasp of debits and credits is really useful and not hard to pick up, yet many people spend a semester studying accounting without developing any intuition at all.)
For the income statement, CR -> revenue and DR -> expense.
When you record transactions in accounting, you're updating various account balances, such as assets, liabilities, and equity. These updated balances contribute to the creation of the balance sheet, which provides a snapshot of a company's financial position at a specific point in time.
The income statement, on the other hand, reflects the changes in these balances over a period of time. There's nothing special about the line items on the income statement (e.g. revenue or expense). Any value on the income statement represents a change in what the company owns (assets) or what it owes (liabilities or equity).
But that just shifts the arbitrariness of the whole thing from the words "debit" and "credit" to the words "left" and "right".
But it does. "Debit" is an English word with an established meaning in common usage. It means to take money out of an account. It is related to the word "debt" which is something that decreases the net worth of the debtor and increases the net worth of the creditor. If you overpay a bill, the (positive) difference between what you paid and what you owed is a credit on your account, and can be used just like money to pay your next bill.
When I deposit money, it modifies two accounts at the bank:
- the account which represents how much money they owe me - and the account which represents how much money they have on hand.
The former is a liability, and the latter is an asset.
The meaning of debit/credit is reversed between these two types of account. So, when I deposit $100, the entries entered are:
- CREDIT mhink's account $100 (increasing liability)
- DEBIT cash account $100 (increasing asset)
Oddly enough, another common financial situation reinforces this interpretation from the other direction: accounts with utility providers. Unlike the bank, your account at the utility company represents how much you owe them. So the meaning of debit/credit is reversed, but so is the direction of responsibility: your account at the utility provider is money you owe them, which is an asset. So when I pay them $100, the entries entered are:
- CREDIT mhink's account $100 (decreasing asset)
- DEBIT cash on hand $100 (increasing asset)This has nothing to do with labeling transactions so that the labels conform to the common meanings of English words. When an account representing assets has its balance go up, that's a credit. When an account representing a liability has its balance go up, that's a debit. And vice versa. If I, say, draw down a line of credit for $100 and deposit the funds in my checking account, then from my point of view, my LoC should debited by $100 and my checking account should be credited for $100.
This makes sense regardless of how you think about the LoC. If you think of the available credit as an asset, then when you draw down the LoC the available credit balance goes down and it's a debit. If you think of the amount owed on the LoC as a liability, then when you draw down the LoC the amount owed goes up and it's still a debit.
> CREDIT mhink's account $100 (increasing liability)
No. This transaction does not increase liability in any absolute sense. It increases liability only from the bank's perspective. From your perspective, it increases assets.
You missed the context: When I deposit money, it modifies two accounts at the bank.
It appeared to me they were very much explaining this from the banks or utility company’s perspective.
Yeah, I get that. I don't see what that has to do with the labels used to describe the transaction.
Actual physical cash is weird because it's an asset to its owner and a liability to the rest of society. But when you deposit cash in a bank, the bank doesn't become the owner of the cash. It has borrowed that cash from you. So that cash is both an asset (because having borrowed it from you it can turn around and loan it to someone else) and a liability (because the bank is in debt to you for the amount of the deposit).
A simpler example is depositing a check. In that case, money just gets transferred from the payor to the payee. It's a debit from the payer's account and a credit to the payee's account. Or at least that's how it should be.
What you're missing here is that if I were to keep my own records, I would also list two accounts. When I look at my bank statement online, what I'm looking at is the bank's records. If I kept my own books, it would be the same thing, but in reverse, like this:
MHINK'S RECORDS
- CREDIT mhink's cash account $100 (decreasing mhink's assets)
- DEBIT mhink's account for the bank $100 (increasing mhink's assets)
BANK'S RECORDS
- CREDIT the bank's account for mhink $100 (increasing the bank's liability)
- DEBIT bank's cash account $100 (increasing the bank's assets)
The cash itself isn't both things- it's only ever an asset.
When I transfer cash from my wallet to the bank, I'm converting $100 of value from one type of an asset to another: from cash, to "a debt I'm owed by the bank".
The bank also didn't change its total position. It took on "a debt owed to mhink" (a liability), but gained "cash" (an asset).
The passage you quoted is from an earlier comment, so you are responding to something way out of context.
Let's rewind:
> Unlike the bank, your account at the utility company represents how much you owe them. So the meaning of debit/credit is reversed, but so is the direction of responsibility: your account at the utility provider is money you owe them, which is an asset.
No. There is no such thing as "an asset" without further qualification. The money you owe the utility company is an asset to them, but to you it's a liability. This is true for all financial instruments, including cash. Cash is an asset to its owner, a liability to society at large. So...
> The cash itself isn't both things- it's only ever an asset.
No, cash is a liability to society at large. The bookkeeping for this happens at the central bank. See:
https://www.federalreserve.gov/monetarypolicy/bst_frliabilit...
"The major items on the liability side of the Federal Reserve balance sheet are Federal Reserve notes (U.S. paper currency)..."
Or it's a debit on the company's account. I think that's the point that was being made; not to confuse technical terms with English common usage, and not to go to the dictionary or etymology(!) as the arbiter. Debits are credits and credits are debits, but the real question is which column does it go into.
Same nature as discussions about clients/servers.
That's exactly right. They owe you money, so it is (or at least it should be) a credit on your account, and a debit on theirs. But that is not what the definition given in the article says. TFA's definition of "credit" was "An entry that represents money leaving an account" and likewise a debit is "An entry that represents money entering an account." So when you paid your bill, that was (by the articles definition) a credit to your checking account and a debit to your account with company whose bill you were paying, which is exactly backwards. According to the standard English definitions, a credit is something that makes your net worth go up, and a debit is something that makes your net worth go down. So when you pay your bill, that should be a debit to you (cash going out decreases your net worth) and a credit to the counterparty (cash coming in increases their net worth).
> Same nature as discussions about clients/servers.
How so? It seems to me that distinction is clear: the client is the machine that initiated the connection, the one that did the DNS lookup.
Dr accountX £100
Cr accountY £90
Cr accountZ £10
https://www.deskera.com/blog/journal-entries/
And got left/right as explanation and also as left and right columns
https://www.accountingweb.co.uk/any-answers/vat-double-entry
For most people who aren't accountants though, the spreadsheet thing is correct.