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Basic Accounts - Credit and Debit of Banking

Published on Saturday, December 06, 2014
The thing is in interviews, sometimes, the interviewers may want to see how much ‘commerce’ you know – or at least how much basic ‘banking commerce’ you know.

For candidates who are from commerce/CA/CS/MBA background – you’ll need in-depth knowledge – interviewers if they ask technical questions, will ask difficult ones and may dig deeper to see how much more you know!

And the candidates who are non-commerce – they’ll start with a little bit of basic knowledge.

Now, since it is a bank interview – it always does well to know the basic accounts with respect to banks – no harm to know about the industry you are aiming to get a job in!

So, today I focus on basic ‘Accounts – with respect to Banks’ and mainly the Debits and Credits.

1. Debit –

When the word ‘Debit’ is used it can mean two things:
  1. That we are taking about an ‘asset’.
  2. We are talking about an ‘expense’.

2. Credit – 

similarly ‘credit’ can also be taken in 2 contexts:
  1. That is a ‘liability’;
  2. Or, it can be an ‘income’.
 Thus remember, Debit = Asset/Expense
                           Credit = Liability/Income

3. Debit – The Assets

Assets are those/that which help us in carrying out our businesses. In Banking/Bank’s point of view –
    • Furnitures and Fixtures – the tables and counters/fans/ ACs, any Vehicle/Cars (for the Branch Manager’s purpose), the computers etc. are the Bank’s Assets – they are used to carry on the Bank’s day to day work.
 Assets are also those which we are ‘receivable’ to us – we have a ‘right to receive’.

For example – if you lent your Bryan Adams CD to your friend – it is your asset. You have not sold it to your friend – you have merely lent it to him for some time – so you have the right to get it back – you may even charge some interest too if you wanted! Like a treat at CCD!
    • In Banking context – ‘Loans and Advances’, ‘Treasury Bills’ ‘Accounts with other Banks – credit balance’, and ‘Prepaid Expenses’ are also assets of a Bank.
    • A Bank had given a loan – it has the right to receive the loan money back (with interest); prepaid expenses are where payment has been made in advance and service/product will be received afterwards (usually in case of telephone bills).
    • Investment in anything is also your asset – as it is your money being put in something for sometime. Thus, where banks park their funds in T-Bills or other Gild Edged Securities will be the bank’s assets.

4. Debit – The Expenses

 Any expense is a debit – but differs due to perspective.

If you are spending money to buy a pen, which is a ‘regular expense’ – you will debit ‘Expenses’ – money is flowing out.

If you are spending money to buy an AC, which is once in a while expense – you will debit, ‘AC Account’ and make it an Asset account!

From a Bank Customer’s point of view, i.e., from your point of view – Savings Bank account is your asset – and if bank deducts some charges from your account (ex.: for exceeding ATM transactions through other bank’s ATMs) – then your account is being debited by the bank.

And vice-versa – when bank pays interest to you – your account is being credited!

5. Credit – The Liabilities

Liabilities are those/that where we have an obligation to ‘pay’.
    • All the Savings/Current/ Recurring/Terms Deposits are Bank’s liabilities!
    • Simply because when we demand it – Bank will have to give us our money! Hence it is actually bank’s liabilities!
    • Liability will also be – telephone /electricity bills that have not yet been paid – because you have taken a service and now you have an obligation to pay – so it’s a ‘payable’. For the telephone companies – this will be an asset – receivable.
    • Liability is also the Capital and Reserves – for any organization and not just for a Bank.

6. Credit – The Income

When you get interest in your saving bank account – your account is being ‘credited’ with interest income.

What is income for you – is expense for Bank – thus the income it credits to your account is debited from its own account – which will be the bank’s expense account.

For a bank though – income is the charges it collects from customers/ interest on loans etc. – these are bank’s income and these incomes are ‘credited’ to its accounts.

I know the debit and credit concepts can be confusing – but you’ll have to keep repeating it in your mind to get to work like fluid in your jargon. Before interviews – ensure that these are perfectly etched in your mind and you comfortably use the correct terms when explaining answers.

“What is Saving Bank Account? – It is a Bank’s demand liability, where customers deposit their money and bank’s pay interest on it. The interest paid by bank is credited to the account of the customer – it is an expense of the bank.”

I hope this was helpful!

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