How to Understand the Credit Debit System

All banks, businesses and even personal accounting use what is termed the "credit-debit" system. On any given transaction, funds flow from one source to another source. The origination of the funds, or where the funds are taken from, is termed the "Debit Account." The destination of the funds, or where the funds are being sent, is termed the "Credit Account." For every debit, there must also be a matching credit. And from every credit, there must also be a matching debit. A very simple exercise may be performed on a piece of paper to illustrate for yourself how this system works.

Things You'll Need

• Pencil and notebook paper

Instructions

1. Draw a line vertically down the center of a piece of notebook paper, from top to bottom. Label the left column "Account One" and the right column "Account Two."

2. Write down under the left column title the amount of $1,000. This is the "Balance" remaining in your pretend "Account One" column. Write down under the right column title the amount of $100, which will be the balance in your "Account Two" account.

3. Subtract $200 from the $1,000 balance under "Account One" by actually writing out the math below it: $1,000 - $200 = $800. Draw an arrow from the number $200 to the line under the balance in "Account Two" where you should add that $200 to the balance, which will then show a new balance in "Account Two" of $300. On the left side of the line you have drawn, closest to "Account One," write "Debit" on top of the line. Then, on the right side of the line, closest to "Account Two," write "Credit."

4. Looking at your prepared columns and the transaction that was made, you will see that money was taken out of "Account One" and it was then sent into "Account Two." The money, in the amount of $200, was debited from "Account One" and was credited into "Account Two." Money can never be debited without a matching credit to a "payee" account, and money can never be credited without a matching "payer" account. This is as simple to remember as, "The payer gets debited and the payee gets credited."

Tips & Warnings

• Businesses use what is termed a "Double Bookkeeping" system that makes the ultimate use of the debit-credit system. For every debit taken from one account, a credit in the same amount is made in the account where money was sent. In this way, all money is strictly accounted for.

References

• Money Instructor: Understanding Credits and Debits
• Accounting and Book Keeping "Cheat Sheet"