Every time I teach an Intro to Financial Accounting course my students get lost on the concepts of debits and credits. For many of the students this is their first foray into accounting outside of their debit cards. They view debits and credits as negative and positive, respectively.

The words debit and credit have Latin roots, but simply mean left side and right side. Investopedia has a short explanation on the history of debits and credits.

Consider the debit and credit terminology as we use for our bank/investment accounts, debit cards and credit cards. When we make a deposit, i.e., credit, into our bank account we know that we have money in our account. However, from the banks perspective they have a liability. At some point the bank knows we will withdraw that money because it is rightfully ours. Using the same principles, when we make a purchase via a debit card or check we are taking money out of our account. The bank no longer “owes” us that money because they just “paid” it back to us through our use of the funds. The bank is using the correct accounting terminology from their perspective. However, it has really confused the everyday citizen about what debits and credits mean and how they are used in accounting.

Debits and credits are used to record business transactions. These transactions are recorded using a double-entry system which helps ensure the accuracy of the information and prevention of errors. While it is not a perfect system, it works most of the time.

It is not necessary to understand debits and credits in order to use your financial data. It is more important to understand the types of accounts used in your business and what transactions increase or decrease those accounts. Knowing why your profits are up or down is really where your energies should be focused.