Debit or Credit?

Yes, which one is it now? This was what I kept asking myself when the T- account was first introduced as part of the Corporate Financial Accounting (CFA) course.

All through the first 10 minutes of the class, I kept wondering if the course facilitator is not mixing up the terms.

Coming from a non-accounting background, all these years that I have been carrying out business transactions and handling of cash, I have known debit to mean that my money in the bank has reduced, to confirm this, my bank sends me a debit alert. Same convention applies when I deposit money in my bank account or someone transfers money to my account; the person often calls – “Hello Sir, I have credited your account, please confirm receipt…”.

The unlearning

While driving home at the end of the classes on that day, I kept wondering about T-account convention of recording financial transactions. It was like learning how to drive a car with the steering wheel on the right side after driving a car with steering wheel on left side of the car for a very long time.

On getting home, yes – you guessed right, I brough out the textbook to read more about this way of accounting record keeping.

The re-learning

While reading through the texts on the T-account, the voice of Dr. Owolabi was re-echoing in my mind and that was when the learning started happening for me.

Let me digress a bit to offer some clarifications on the process that has just occurred: the unlearn to re-learn process. This happens when you have been so used to doing something in a particular way for a long time; also, everyone you know or have met does it the same way. When you are being taught of a different way of doing that same thing, you will have to keep an open mind and not get fixed on the old way. Being fixated on the old way of doing things, because it has worked for you in the past, will make you lose out on the gains and improvements that come with the new way of doing that thing.

Now, back to my learning of what the T-account is all about; let me summarize what the T-account is, perhaps, you will not experience the same initial confusion I had.

The T-account

I learnt that the T-account also called ledger account is a means of recording financial transactions that allows double entries (positive and negative) for the same account.

The term T-account helps to describe the appearance of the double entries, this starts by drawing a large letter T on a page. Positives or increases are entered one side of the vertical line of the T-account while negatives or reductions are entered on the other side.

The right side of the T-account is referred to as credit and the left side of the T-account is called the debit.

The side to enter the positives and negatives depend on the type of account you are dealing with. For an asset account, the more increase or positive, the more the ‘left’ or ‘debit’ and the more reductions or negative the more ‘right’ or ‘credit’. However, for a liability and owners equity accounts, the more the increase, the more the ‘right ‘or ‘credit’ and the more the negative or reductions, the more to the right or ‘debit’.

By illustration, let us assume that a company issued shares worth $50,000. This transaction will appear in the assets and shareholders’ equity T-accounts as shown below.

Now, when I get the debit or credit notifications from my bank, I smile and say to myself, I know what you guys meant. You cannot confuse me anymore.

Thanks for reading.

Image source: www.shutterstock.com

#MEMBA11