Since ancient times, bookkeeping and accounting methods have been a means to record entries and manage financial information. From the first use of handwritten ledgers to the cloud-based accounting tools used today, it is no surprise how commonly used terms such as Debits and Credits have become so confusing.
For instance, the terms Debits and Credits have a double meaning as it relates to accounting and to your bank account. Also, the word “Credit” closely resembles the term “Credit Memo”—which adds further confusion about how the phrase is used in Accounting. Don’t worry; the below definitions will help add clarity to the Debits and Credits terminology used by businesses today.
Accounting Debits and Credits
Debits and Credits are balanced entries in a double-entry accounting system. In such a system, your Debit entries must always equal your Credit entries. Also, every entry you make into a general ledger system will generate at least one debit amount and one credit amount. Furthermore, a debit to an asset account will increase its value while a credit to an asset account (like cash) will decrease its value.
Banking Debits and Credits
Banking debits and credits are transactions that affect your bank account only. They are the opposite of accounting debit and credits because a debit entry to your bank account will decrease its value and a credit will increase its value. In order to eliminate confusion, several banks have moved away from these terms by using more logical ones likes receipts, deposits, disbursements, or fees.
Customer Credit Memo
This type of memo is used to forgive payment that is due to you from a customer.
Vendor Credit Memo
Conversely, a Vendor Credit Memo is used to forgive payment that is due to a supplier.
In the lending arena, Credit is used to denote a set amount of money you are willing to loan and have a customer owe you for your goods or services rendered.
Tips from Accounting Seed
Reach out to Accounting Seed by emailing us at firstname.lastname@example.org to discuss how we can successfully manage your company’s Debits or Credits. Request a free demo or by calling us today at (410) 995-8406.