Financial Accounting: Why are the Rules of Debits & Credits Backwards?


After learning the rules of debits and credits some students wonder why accounting is backwards to real life and this backwardness causes some confusion. Let me see if I can clear this up. Students who think the rules of debits and credits are backwards, often refer to a banking example. In accounting, cash is an asset and assets are increased with debits. In banking, cash is decreased with a debit. The bank debits your account when you spend money. Let’s recall that assets are increased with debits and liabilities are increased with credits. Your checking account is an asset to you. It has value and provides benefit into the future assuming your balance isn’t overdrawn. But what is your checking account to your bank? Your checking account is a liability to your bank. Let’s look at the characteristics. It’s something that they owe. If you go to your bank and demand your money they will give it to you because they owe it to you. So to your bank your checking account is a liability. Now let’s see if the rules of debits and credits makes sense when we think of this – your checking account – from the bank’s perspective. When you deposit money into your account your bank credits your account. Your bank’s liability to you has increased and liabilities increase with credits. When you take money out of your account or spend it, your bank debits your account. Your bank’s liability to you has decreased and liabilities decrease with debits. So, in summary, the rules of debits and credits aren’t backwards. We just have to remind ourselves who’s accounting are we doing, ours or the bank’s? I hope this short explanation helps you see that the rules of debits and credits aren’t backwards and accounting for debits and credits are the same no matter what company or industry is doing it.

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