One of the most frustrating aspects of accounting is the jargon. Unfortunately, the confusion begins right in Accounting 101 at the very beginning when you’ve just dipped your toe in the water. Debits and credits don’t mean what you think they do if you’re just an average Joe like me (or in my case, an average Matt). So how did I wrap my mind around the accounting definition of debits and credits?
Let’s start with the definition that you need to toss in the trash can. When my bank credits my account with money (let’s say interest), my account balance increases. When they debit my account (let’s say a bank fee), the balance decreases. This is what most folks normally think of when they think about debits and credits. But when it comes to accounting assets and liabilities, the opposite is true. How can this make sense to you? Just switch hats!
Bookkeeping instructor Ben Robinson of the Bookkeeper Business Academy really helped clear the fog for me on this. When you think about accounting assets and liabilities, put on the banker’s hat, not the consumer’s hat. Think about the win/lose. If your assets increase (interest payment to you), the banker’s asset decreases. You win, he loses. So from HIS PERSPECTIVE a debit is going on. So, to increase your asset account, you apply a debit (remember — think about it from his perspective). When your assets decrease (a bank fee is charged to you), he wins, you lose and he views it as a credit. So a decrease to your asset account, is called a credit. Since a healthy asset balance is always positive, it’s called a debit balance.
For liabilities the opposite holds. The more you owe, the less you like it right? But the guy you owe money to, loves it. So, again, switch hats. As your liability goes up, it’s considered a credit to your liability account (credit good for the “other guy”). As your liability goes down, it’s considered a debit to your liability account (debit bad for the “other guy”).
If you’re a Seinfeld TV show fan, just think about the bizarro world episode where Elaine met the polar opposite of her friends. As long as you can change your perspective on where the money is flowing, you can tackle the confusion of debits and credits.
Does accounting jargon keep you up at night? Share some of your thoughts in the comments section.