If Trustworthy Bank decreases Debris Disposal's checking account balance by $13.00 to pay for the bank's monthly service charge, this might be itemized on Debris Disposal's bank statement as a "debit memo." The entry in the bank's records will show the bank's liability being reduced (because the bank owes Debris Disposal $13 less). Many banks charge a monthly fee on checking accounts. The bank's detailed records show that Debris Disposal's checking account is the specific liability that increased.Īt the same time the $1,000 wire transfer is received at the bank, Debris Disposal makes the following entry into its general ledger:Īs a result of collecting $1,000 from one of its customers, Debris Disposal's Cash balance increases and its Accounts Receivable balance decreases. The debit increases the bank's assets by $1,000 and the credit increases the bank's liabilities by $1,000. These two facts are entered into the bank's general ledger as follows: Two things happen at the bank: (1) The bank receives $1,000, and (2) the bank records its obligation to give the money to Debris Disposal on demand. Let's say Trustworthy Bank receives a $1,000 wire transfer on your company's behalf from a person who owes money to Debris Disposal. The bank's detailed records show that Debris Disposal's checking account is the specific liability that increased. In general journal format the bank's entry is:Īs the entry shows, the bank's assets increase by the debit of $100 and the bank's liabilities increase by the credit of $100. Instead, the bank credits a liability account such as Customers' Checking Accounts to reflect the bank's obligation/liability to return the $100 to Debris Disposal on demand. Because the bank has not earned the $100, it cannot credit a revenue account. The rules of double-entry accounting require the bank to also enter a credit of $100 into another of the bank's general ledger accounts. Since trustworthy Bank is receiving cash of $100, the bank debits its general ledger Cash account for $100, thereby increasing the bank's assets. Now let's say you take that $100 to Trustworthy Bank and deposit it into Debris Disposal's checking account. (An alternate title for the Unearned Revenues account is Customer Deposits.) Instead, the liability account Unearned Revenues is credited because Debris Disposal has a liability to do the work or to return the $100. Since the company has not yet earned the $100, it cannot credit a revenue account. The rules of double-entry accounting require Debris Disposal to also enter a credit of $100 into another of its general ledger accounts. When the money is received your company makes the following entry:īecause it has received cash, Debris Disposal increases its Cash account with a debit of $100. Let's say that your company, Debris Disposal, receives $100 of currency from a customer as a down payment for a future site cleanup service. Let's look at three transactions and consider the related journal entries from both the bank's perspective and the company's perspective. Similarly, you learned that crediting the Cash account in the general ledger reduces its balance, yet your bank says it is debiting your checking account to reduce its balance.Īlthough the above may seem contradictory, we will illustrate below that a bank's treatment of debits and credits is indeed consistent with the basic accounting procedure that you learned. After all, you learned that debiting the Cash account in the general ledger increases its balance, yet your bank says it is crediting your checking account to increase its balance. If you are new to the study of debits and credits in accounting, this may seem puzzling. Conversely, if your bank debits your account (e.g., takes a monthly service charge from your account) your checking account balance decreases. When you hear your banker say, "I'll credit your checking account," it means the transaction will increase your checking account balance. Bank's Debits & Credits, Bank's Balance Sheet, Recap
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