Why Debits and Credits Aren’t Backwards in Accounting

Have you ever been confused about why debits and credits seem backwards in accounting? In this episode of Accounting Basics for Beginners, Accounting Stuff addresses this common dilemma and aims to set the record straight. With a staggering 39 million search results on the topic, it’s clear that many people are seeking answers. In this short video, you’ll learn why debits and credits appear backwards, what phrases like “debited to your account” actually mean, and ultimately why debits and credits AREN’T backwards. So let’s dive in and put this issue to rest once and for all.

In order to understand the apparent contradiction, we need to consider things from a different perspective – that of the bank. While to the customer a checking account is an asset, to the bank it is actually a liability. When money is deposited, the bank debits its cash to increase it and credits the amount owing to the customer, as it owes them that money. So from the bank’s point of view, credits increase liabilities and debits decrease liabilities. It’s all about perspective, and once you grasp this, debits and credits won’t seem backwards anymore.

Why Debits and Credits Aren’t Backwards in Accounting

Introduction

When it comes to understanding debits and credits in accounting, there is often a lot of confusion. Many people believe that debits and credits are backwards, especially when it comes to banking transactions. However, it’s important to dispel this misconception and provide a clear explanation of why debits and credits are actually not backwards. In this article, we will delve into the background and reasons behind this confusion, and ultimately shed light on the correct perspective of debits and credits in accounting.

Background

In Accounting Basics Lesson 6, the video by Accounting Stuff tackles the question of why debits and credits appear to be backwards on bank statements. This video is part of a series on Basic Accounting for Beginners, and it aims to address the confusion surrounding this topic. With numerous search results, about 39 million, on debits and credits being backwards, it’s evident that this is a widely debated and misunderstood issue that needs clarification.

Confusion about debits and credits in accounting

One of the main reasons for the confusion surrounding debits and credits in accounting is the misunderstanding of the terminology used. People often struggle to grasp the meaning of phrases such as “debited to your account.” This confusion leads to misconceptions and the belief that debits and credits are reversed.

39 million results on debits and credits being backwards

A simple search on the topic of debits and credits being backwards yields an overwhelming number of results – approximately 39 million. This indicates the magnitude of the confusion surrounding this issue. With such an enormous number of search results, it becomes clear that addressing and clarifying this misconception is of utmost importance.

Purpose of the article

The goal of this article is to clear up the misconception about debits and credits, providing readers with a comprehensive explanation. By shedding light on the correct perspective of debits and credits in accounting, we aim to help readers understand and overcome the confusion that surrounds this topic.

Explanation of phrases such as ‘debited to your account’

In order to understand the correct perspective on debits and credits, it’s essential to first comprehend common banking terminology. Phrases such as “debited to your account” can be confusing if their meaning is not fully understood. By explaining the underlying meaning of these terms and linking them to accounting practices, readers can gain a clearer understanding of how debits and credits work in the context of banking.

Reasons why debits and credits appear backwards in accounting

The confusion about debits and credits stems from the different perspectives of the bank and the customer. Customers often view their checking accounts as assets, which aligns with the expectation that debits should increase cash, while credits should decrease it. On the other hand, banks consider checking accounts as liabilities, which means debits decrease the amount owed to the customer, while credits increase it. This difference in perspective leads to the perception that debits and credits are reversed.

Why debits and credits are actually not backwards

The notion that debits and credits are backwards is debunked by understanding the fundamental principles of accounting. Debits and credits have specific meanings and are not interchangeable. By explaining the concept of normal debit and credit balances and clarifying the movement of assets and liabilities, it becomes clear that debits and credits are not reversed.

Example of how debits and credits work in banking

To provide a practical example, let’s consider a scenario in which a customer deposits money into their checking account. From the bank’s perspective, this deposit results in a debit to their cash, as it increases the amount of money they hold. On the other hand, the bank credits their amounts owing to the customer, as they owe that money back. When the customer withdraws money, the bank debits their account to decrease the amount owed, thus reducing the customer’s balance. From the customer’s point of view, the checking account remains an asset, as debits increase assets and credits decrease them. This example demonstrates how debits and credits align with the different perspectives of the bank and the customer.

Perspective of the bank

For the bank, checking accounts are liabilities rather than assets. This perspective is crucial in understanding why debits and credits may seem reversed. The bank considers the amount owed to the customer as a liability and classifies it as a credit item. Therefore, debits decrease the amount owed (credits), while credits increase it.

Perspective of the customer

From the customer’s point of view, a checking account is considered an asset. Therefore, debits to the account increase the customer’s assets, while credits decrease them. This alignment with the customer’s perspective reinforces the notion that debits and credits are not backwards but rather depend on the viewpoint.

Conclusion

In conclusion, the belief that debits and credits are backwards in accounting is a common misconception. Through a comprehensive explanation and the clarification of terminologies, it becomes clear that debits and credits are not reversed. The different perspectives of the bank and the customer play a significant role in understanding this notion. By understanding the fundamental principles of accounting and the movement of assets and liabilities, the confusion surrounding debits and credits can be dispelled. Accounting Stuff’s video on this topic provides further insight and a valuable resource for those seeking a deeper understanding of this concept. With the clarification provided in this article, readers can now confidently navigate the world of debits and credits in accounting.