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Debit And Credit - The Great Misconception - added 21/02/2010

When I went to school, my accounting teacher used to say that the golden rule of accounting was to  "debit the receiver and credit the giver". This never really made any sense to me, because I knew that  when I deposited funds to my bank account that this resulted in my bank account being credited, and not debited as my accounting teacher seemed to imply.

 

The key to understanding this apparent contradiction is to understand what a bank account actually is. Most of us never give it a second's thought, but from the bank’s perspective, a bank account is actually a customer account within the bank’s accounting system. When we receive a bank statement , we are actually looking at a printout of a customer account from the bank’s accounting system.

 

As we all know, when we deposit funds to our bank account, the bank credits our account. A credit balance represents monies owed by the bank to us, and is therefore a liability for the bank.

 

As a customer of the bank, a credit balance on the bank’s customer account statement is viewed as a positive thing for the customer. Generally speaking, we have a tendency to view a credit balance as a good thing since we are normally viewing someone else’s accounting system and this is the source of the apparent contradiction mentioned earlier.

 

However, if a bank’s customer is a business, and assuming that the bank’s customer account statement has a credit balance, then the bank account within the customer’s accounting system will have a debit balance which makes sense as this is an asset of the business.

 

To summarise, if a customer’s bank statement has a credit  balance, then this is a liability for the bank and an asset for the customer. A liability in one accounting system can represent an asset in another accounting system. A credit balance in a bank’s customer account, will be represented as a debit balance within the customer’s accounting system. When we set up an accounting system of our own, we need to remember that this is our accounting system and that our assets will be represented a debit balances within the system.

 


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