Why is a credit card called a “𝐜𝐫𝐞𝐝𝐢𝐭” card?
Why is a debit card called a “𝐝𝐞𝐛𝐢𝐭” card? 👇
An example of a debit card payment is shown in the diagram below.
🔸 Each transaction in the business system is transformed into at least two journal lines in the ledger system. This is called 𝐝𝐨𝐮𝐛𝐥𝐞-𝐞𝐧𝐭𝐫𝐲 accounting, where every transaction must have a 𝐬𝐨𝐮𝐫𝐜𝐞 account and a 𝐭𝐚𝐫𝐠𝐞𝐭 account.
🔸 Each journal line is booked to an account.
🔸 Each account belongs to one of the three components in the balance sheet:
💡Asset = Liability + Equity
Let’s look at the issuing bank’s ledger as an example:
Bob pays $100 to the merchant with a debit card. We have two accounts involved in this transaction:
1. Journal line 1 – From the issuing bank’s point of view, Bob’s bank account is a 𝐥𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐲 (because the bank owes Bob money). Bob’s bank account is deducted by $100.
This is a 𝐝𝐞𝐛𝐢𝐭 record.
2. Journal line 2 – Bank’s cash is an 𝐚𝐬𝐬𝐞𝐭 and the bank’s cash is deducted by $100.
This is a 𝐜𝐫𝐞𝐝𝐢𝐭 record.
The balance sheet equation still balances with the two journal lines recorded in the ledger.
Bob’s card is called a “debit” card because it is a 𝐝𝐞𝐛𝐢𝐭 𝐫𝐞𝐜𝐨𝐫𝐝 when paying with a debit card.
👉 Why is this important?
This is how a ledger system is designed, only a real ledger is more complicated.
Applying these strict accounting rules makes reconciliation much easier!