Have you ever wondered how your Bank handles
Debits and Credits? When they Credit your Checking Account, your
balance increases. But I thought its Debits that are supposed
to increase Cash, not Credits. How does any of this make sense?
I’m going to answer that for you right now. [Music] Hey, I’m James and welcome back to Accounting Stuff.
Today’s video is a really quick one that I hope will clear up some confusion about a
question that I get asked all the time. Why are Debits and Credits backwards in banking?
I’ve said in previous videos that Cash is an Asset, which is a normal Debit balance
so Debits increase it and Credits decrease it.
However, when I deposit money into my bank account they Credit my account, which increases
my balance. And when I withdraw money to go and pay for
something they Debit my account which decreases my balance.
We appear to have a direct contradiction here. I’m going to explain why that is not the case.
To solve this little puzzle, we need to put ourselves into the shoes of the Bank.
From the Bank’s point of view, our Checking Account is a Liability, not an Asset.
If we go to the Bank, and deposit money into our Checking Account, the Bank Debits their
Cash to increase it, and it Credits its Amounts Owing to us because it owes us that money
back. Whenever we want, we can go down to the Bank
and withdraw our money from our Checking Account. So from the Bank’s perspective, Checking Accounts
are Liabilities, not Assets. Liabilities are normal Credit accounts, so
Credits increase Liabilities and Debits decrease Liabilities.
From the Customer’s point of view, nothing has changed.
The Checking Account is still an Asset to the Customer.
Debits increase Assets and Credits decrease Assets.
So there we have it, Debits and Credits aren’t backwards in banking.
It’s all about PERSPECTIVE. From the Customers point of view, their Checking
Account is an Asset. But from the Bank’s point of view, their Checking
Account is a Liability. Thank you for watching!
If you found this video useful give it a LIKE. Don’t forget to SUBSCRIBE and hit that little
bell to be notified when the next video is out.
Have a great week, and see you next time! [Music]