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In this modern day and age, the words “debit” and “credit” are heard on a daily basis. In everyday uses they may mean different things. But in financial terms, debits and credits mean completely opposite of what we expect, and this article will explain why.

Generally people think of the word “debit” they think of their debit cards. This card can be used to withdraw cash from ATM machines or to pay for things in stores. We generally think of debit as money taken from our bank accounts.

Now on the other hand, credit is something we get. Banks and other finance companies give us credit cards which we can use to buy things with money that doesn’t come from our accounts. This is seen as a credit as we are using money that we didn’t have to work for.

This is a common understanding of most people, however in accounting terms our understanding is only partially right. In every transaction there is a debit side and a credit side.

For example, if you buy a new bag and use your debit card to pay for it, the money is deducted from your account. This money then goes into the account of the store. Hence there is a transaction for each siuation.

A debit is something received by someone, and a credit is what was used to get the thing that you received. Let’s put that to our example. When you buy a new bag and use your credit card, you’re receiving the item that you want to buy, so this is a debit even though you received something. Although in real life receiving something sounds like credit, however in accounting term this is a debit. As the credit card company pays the bill, their liabilities to you decreases, so this transaction is a credit for them.

Liabilities are credit accounts, putting money into the bank is a credit for you as this increases the bank’s liability towards you, meaning they must keep track of this money for you. When you take out the money, the bank’s liability towards you reduces, and hence this is a debit for them.

We have adopted these accounting terms for ourselves and they don’t always work for us in the same way as they do for the bank. In summary debit and credit is a measurement of liability, they are accounting terms use by the banks.