True Meaning of Debit and Credit

Although it is simple in its definition, the meaning is rarely discussed or at least the discussion is not on plain sight. My blog here is to show you the true meaning of debit and credit.

In its simplest form, debit represent left side of the general account while credit represent right side of the general account. It represent the popular formula for accounting: Assets = Liabilities + Equity. However, no one explain why debit and credit are like this, making the misconception that debit is negative and credit is positive.

First, we need to know what is the content of debit and credit. Debit consists of assets and expenses; assets are capital that you spent or earn for the business, basically they are the business property as in a value. Expenses are the costs you make for production in a business. Cash itself also considered an asset too as you used them spend for the business (cash is a capital, suprisingly people don't talk about it)

On the other hand, credit consists of liabilities, equity and revenue. Liabilities are value that you owed to other people, this can be either loans or accounts payable. Loans are money that you borrowed before paying it back with interest whereas accounts payable are amount you owed after receiving the product or services. This is where the concept of deferred payment comes in as many people around the world like to pay later instead of immediate for some genuine fear of handling their budget and finances.

Equity is the shareholder or owner claim to the assets, basically the net assets after liabilities are all cleared up (which makes the formula logical). This comes in form in shares as they represent a percentage of the company ownership and profit (or retained earnings) where all the net profit are added in. Revenue is how much you earn in a production and selling them.

From the formula perspective, we can see why liabilities is on the right side of the equation. It needs liabilities to balance the accounts as everything must be 0 as the results. Not only that, you could say that liabilities represent the amount that you currently had but haven't paid yet. In a sense, you still have that money.

Therefore, my definition of debit and credit is this: Debit is the accounts where you spent for the business whereas Credit is the accounts where you earn for the business. I should also add that credit means owed money so it got a dual meaning.

To explain from the debit and credit card perspective, cash represent your assets and your debit card is spending from your debit side, which is why it takes money from your account. Meanwhile, credit card represent your liabilities to the bank as you pay using the bank money, making it liabilities in the process until you pay it back.

Another way you can see is from the bank revenue and expenses perspective. In debit, the bank pays you as you use the money in your account and since bank share money in their balance sheet, they are debited. Meanwhile, credit is where the bank earn money as you pay them back for using their money in the credit card.

I like to add debit and credit related terms just in case you are confused in conversation.

Debtor means that the person owes you money, Creditor is where you owe the person the money.

In using verbs, when you say debited to, add in credited from. This goes for credited to, debited from. From there, it is simple to learn.

(Write your comments to see what can I improve in this guide)