Debit and CreditWhat is debit and credit? Explain please.
These are generally used in terms of finance, our money. A debit is an amount of money subtracted from what we have. A credit is an amount of money added to what we have.
For instance, if I have $200 in the bank and make a $50 deposit, the bank with credit my account with $50, giving me a new total of $250.
If I have $200 in the bank and write a check for $50, the bank will debit my account for $50, meaning the bank will take $50 out of my account, leaving me with a new total of $150.
Simply put, debit means to "take away" and credit means to "add to." So, when it comes to money, credits are better than debits!
When it comes to your money, and the way you spend it, you can bring it down to this:
Debit is the money you have already saved in your checking or savings account. When you shop, if you use the debit option, you are basically taking money out of your "piggy bank" and the deduction shows up sometimes instantly.
Credit is the "never never"- You run the bill, get the statement, and, depending on how good pay you are, they will tell you ways to pay it back. Of course, as you do this, they will charge you on top of it because they need to get paid for keeping your paperwork, so you actually in the end , pay more.
Debit comes from your bank...directly from your debit card. It is your money. Mostly it is free, but in some places there are fees attached to using debit machines that are not in your banik's network.
Credit comes from a line of credit (someone else's money that they allow you to use) from a bank or department store, or even a gas station. Credit comes with fees, interest rates, etc. depending on the agreement you enter into with the creditor.
Debit and credit are basically accounting terms. As banks and finance functions make heavy use of accounting, they also use these terms quite frequently. This does not mean that debit and credit are primarily banking or finance terms.
To understand the meaning of debit and credit properly we first need to be clear about the concept of "double entry accounting". Any transaction monetary transaction - which may involve money or money's worth - has impact on two accounts simultaneously. For example, when I deposit money in bank, it impacts on one hand the money I have to receive from the bank, and on the other it impacts the money bank owes to me. Thus this transaction mus be recorded in two different accounts - my account and the banks account. The account statement I receive from the bank or see on-line on my computer is just one of the many customer accounts. The bank also maintains a common account showing money received from and paid to all its customers. The individual customer accounts enable the bank and the customers to know at any time the balance amount in each customer account. The common bank account enables the bank to know at any time the the total money they have to pay to or receive from all their customers taken as a group.
Double entry system of accounting involves recording of the impact of any transaction on both the accounts impacted by the transactions. Money or money's worth flows out of one account. This account receives the credit for the transaction. Also the money or money's worth flows in to another account. This account gets debited with the amount. The value of debit and credit in any accounting transaction is exactly equal. For example, when a company buys material on credit the material comes to the company. That is value of material flows out of the supplier to the buyer. Therefore, account of the seller gets credited and that of the buyer gets debited. When the buyer pays the seller for the material purchased the money is transferred from the buyer to seller. Therefore the account of buyer is credited and that of seller is debited.
At any time all the credit and all the debits can be totalled and compared. When total credit is more than the debit, the account has a credit balance by the difference. Similarly an account may have a debit balance.
Now having the understood the concept of debit and credit we can define these two terms. Credit in accounting means the amount that is owed to or due to be received by an an account, and debit means the amount owed by or due to be paid by an account.
I hope these explanations also clear the question raised in Post #3. The question raised in Post #4 is a separate subject which should not be mixed with concept of debit and credit.
Debit and credit are banking terms used to indicate what place money is in relation to the person that wants it. Credit is used to mean money that is available to someone and debit is used to mean money that a person has.
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