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Credit? Debit? Which is it?
When I deposit money in my bank account, the bank credits it. Is the bank misusing the word 'credit' in this context? Why does the bank use the term credit to refer to your deposit, instead of debit?
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 Oh, you have opened up the can of worms called accounting terminology! Consumers often think about credit cards that access a line of credit and debit card that access a deposit account; therefore, it might be logical to think that "credit" only gets used with accounts that you owe, and that "debit" refers to accounts that your bank owes to you.
Here's where it gets confusing. Consider the fact that when a bank owes you money, your checking account, for example, you look at it as an asset, something you are owed, and your bank considers it a liability, something it owes to you. Your credit card balance, on the other hand, is an asset to your bank. It is owed to the bank, and a liability for you; you owe the funds.
Accounting conventions say that assets are increased using debits and reduced using credits. Liability accounts are increased with credits and reduced with debits, so if your bank accepts a deposit to your checking account, your balance goes up and the bank records a credit to your account. If you were running a business, your accountant would record the deposit with a debit to your account with the bank because it's an increase in your asset.
For a loan or revolving credit account, which is an asset to the bank and your liability, a payment (a reduction in the loan balance) would be recorded with a credit on the bank's books and with a debit by your accountant to lower your liability to the bank.
Maybe it would have been better just to say "trust your bank." After all, does it really matter what the bank calls it, as long as when you make a deposit your account balance goes up?
Published on BankingQuestions.com 7/20/09
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