Debit and Credit

Let's start off with the most fundamental topic in the field of finance. I saw many people around me who get confused with the usage of the terms debit and a credit. A debit and a credit form the most basic elements for financial transactions.

It all depends on the situation where these terms are used. A debit is not always positive and a credit is not always negative. The balance on an account is either a debit or a credit but not a positive or negative. It all depends on the type of accounts where these transactions take place.

To understand in a better way, we take an example of each. It is almost always assumed that a debit decreases the balance and a credit increases the balance. Though this is true in case of a savings account where you use your debit card, it is not always true.

Accounts which deal with dividends, expenses and losses increase in value when debited. This is because by debiting you are actually decreasing your loss and thereby increasing your value.
Opposite is the way with gains, income or savings accounts where a debit transaction increases the value and a credit transaction decreases the value.

So it all depends on the type of account you are crediting or debiting. The same is the case with the credit card account we generally use. By using your credit card, you make debit transactions and thereby decreasing your value. This is because, the more you use your credit card, the more you owe your bank. So a credit transaction here means, you are actually paying your debit and thereby increasing your value. Your payment for a credit card bill is a credit, where as, your usage of credit card is a debit.

It's all in the type of account these transactions take place.