I want to clear this up because it creates confusion for a lot of people.
The reason for the confusion are banks and how we talk to them.
For instance, when you put money in your account the bank will credit it.
When you take money out of your account, they will debit it.
A debit card is issued for the purpose of accessing your funds and to take money out from your account.
Now, if you think about this, it really seems like it’s exactly the opposite of what we just learned.
Cash is an asset. And, according to ADEx LER, resides on the debit side of the account equation. And, therefore, increases with a debit.
If you’re adding money, you will debit it, and if you’re taking money out, it will be credited.
So, why is this backward with banks? Do the general rules of accounting not apply to them? Actually, they do, but they look at it from their point of view, not yours.
Think about that.
When you put money in your checking account, it belongs to you, not to the bank. The bank just holds it for you.
So, for the bank, this money really is a liability, because at some point, they’re going to have to pay it back to you.
According to ADEx LER, liabilities are on the credit side of the equation, right? And, to increase a liability, you will have to credit it. Therefore, the bank will credit your account when you put money into it.
Likewise, when you buy stuff with your debit card, this will reduce the balance in your account. The bank owes you less money. Therefore, it will be debited and hence the name, debit card.
This is why it seems backwards. The same accounting rules apply to banks as well as to any other business in the world.
The terminology they use may be confusing because it’s from the point of view of the bank and not from your point of view.
What about credit cards?
Well, if you’re issued a credit card, the bank or the provider of the card, is providing a line of credit to you.
In other words, credit cards combine payment services with the extension of credit.
And, like for any loan, you’re going to be charged interest, actually very high interest, for the balance you carry over from month to month.
In addition, credit cards may offer additional insurance on purchases or make it easier to request a refund or a return.
But, in the end, the main purpose is to award you a line of credit or credit limit, hence the name.
I hope this was helpful to avoid confusion.
Please just stick to the definitions of debits and credits that we just learned and always remember ADEx LER and you’re going to be fine.