Why Credit/Debit Reversed In Banking Accounting?

A bank’s accounting credit debit seems reversed to most individuals and can be confusing. In an account for an asset held by a bank, a credit lowers the value of the asset and a debit increases the value. Why this occurs is more a question of how banks look at credits and debits. It is first important to understand that the words credit and debits really do not have any meaning as to increasing or decreasing value. The meaning assigned to them is based on their purpose in the context of the user. For bank accounting, the context for a debit and credit differs from what the public may generally understand that context to be.

Bank Debits Explained

If we think for instance in terms of liabilities and assets, a bank making a loan is looking to reduce a debt liability. This reduction takes place not when a credit is placed into the loan or liability account but a debit. The debit reduces the amount of the loan liability and thus and creates a positive balance or asset for the borrower. In this context, debits are good (only from the standpoint of creating a positive) and credits would not be good.

Bank Credits Explained

A credit to a liability account for bank accounting purpose increases the loan obligation. This would not be seen as good from the borrower’s standpoint because an increase in the liability in fact increases the amount of the debt. Credits are not seen as favorable to a borrower in a liability account such as a loan account as a debit would be, which previously stated reduces the liability and creates a positive balance.

Credits and Debits as Accounting Measures

Now  credits or debits are neither bad nor good in actuality. They are simply accounting measures used to keep track of the state of a liability by a bank. The amount of debt that a business maintains and the associated debits and credits are a preference of the business and can be deemed good or bad to the business on a personal rather than a global basis. What may be considered bad for one business or borrower in terms of their debits and credits may be good for another.

Disassociating the identification of debits and credits as poor or bad will help you not view the accounting method as being reversed. The use of debits and credits simply is an accounting function designed to keep score and ensure the lender or bank that the entries in behalf of a liability accurately reflect repayments and retirement of the debt.